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2020 (10) TMI 510 - AT - Income TaxTDS u/s 194C / 194H - Disallowances u/s 40(a)(ia) - expenditure claimed by way of sales rebate / discount given to the dealers / distributors - HELD THAT - A reading of section 194C of the Act would suggest that in respect of any payment made to a contractor/sub contractor for carrying out any work, including supply of labour, would be subject to deduction of tax at source at the appropriate rate. In the facts of the present case, the assessee has entered into a sale contract, simpliciter, for sale of its products to dealers/distributors. Certainly, the transaction between the assessee and the dealers/distributors cannot be termed as a contract for work. The assessee simply sells its products to dealers/distributors who, in turn, sell them to the end users. Therefore, there is no element of work as defined under clause (iv) of Explanation to section 194C of the Act. Therefore, under no circumstances, section 194C of the Act would be applicable to the discount/rebate. We hold that the rebate/discount given by the assessee to the dealers will not coming either within the purview of section 194C or section 194H therefore, would not require deduction of tax at source. At this point, it is relevant to observe, the AO while invoking the provisions of section 40(a)(ia) has stated that it attracts section 194C / 194H - The aforesaid statement of the AO makes it clear that he himself is not sure whether it is a payment for carrying out any work or is in the nature of commission / brokerage for any service rendered by another party in the course of buying and selling a product. That being the case, no disallowance under section 40(a)(ia) can be made. Accordingly, we delete the disallowance. Disallowance u/s 40(a)(ia) being 30% of the volume discount - HELD THAT - Revenue has failed to establish any principle agent relationship between the assessee and the dealers/distributors to whom volume discount was given. Therefore, following our detailed reasoning given in respect of ground no.2, we delete the disallowance made by the AO. Disallowance u/s 40(a)(ia) - reimbursement of octroi and insurance to dealers/distributors - HELD THAT - neither there is any contract for work between the assessee and the dealers/distributors as provided under section 194C of the Act, nor there is any principal agent relationship between the assessee and the dealers/distributors to treat the payment made as commission in terms of section 194H r/w its Explanation. Since the payment made by the assessee are not covered under section 194C/194H of the Act, no disallowance under section 40(a)(ia) could have been made. At the cost of repetition, we must observe that considering the limited issue arising in the present appeal as to whether the reimbursement of octroi/insurance claimed is covered under section 194C/194H thereby, requiring deduction of tax at source, we refrain from expressing any opinion whether the expenditure is allowable as a business expenditure at the hands of the assessee. TDS u/s 194C - Disallowance u/s 40(a)(ia) - payment made to dealers/distributors on account of refurbishing and repair of defective products - HELD THAT - Assessee allows 30% additional discount in respect of the defective products by issuing credit note. Thus, it is very much clear, ordinarily it is the duty of the assessee to repair/refurbish the defective products. Basically, as a matter of convenience, assessee has outsourced such work to the dealers/distributors and allowed additional 30% discount. In our view, this additional 30% discount given by the assessee towards cost of repair is nothing but payment made towards contract for work as described under section 194C of the Act. In fact, in the submissions made before the AO the assessee itself has stated that such discount was provided for cost of labour. Payment made towards refurbish / repair clearly comes within the ambit of section 194C - assessee having failed to deduct tax at source in terms thereof, the disallowance made by the Assessing Officer under section 40(a)(ia). TDS u/s 194H - Disallowance being the provision for sales rebate under section 40(a)(ia ) - HELD THAT - AO has not raised any doubt with regard to the genuineness or allowability of expenditure. He has disallowed part of such expenditure simply for the reason that tax has not been deducted at source in terms of section 194H - Commissioner (Appeals) has also approved the aforesaid decision of the AO. Therefore, the limited issue before us is the validity of disallowance u/s 40(a)(ia) - we decline to entertain the fresh plea of learned Departmental Representative. The decisions cited by the learned Departmental Representative being factually distinguishable would not apply to the facts of the present case. The ground raised by the assessee is allowed.
Issues Involved:
1. Disallowance under section 40(a)(ia) of the Income Tax Act, 1961, on account of expenditure claimed as sales rebate/discount to dealers/distributors. 2. Disallowance of volume discount under section 40(a)(ia). 3. Disallowance in respect of reimbursement of octroi and insurance to dealers/distributors under section 40(a)(ia). 4. Disallowance for payment made to dealers/distributors for refurbishing and repairing defective products under section 40(a)(ia). 5. Disallowance of provision for sales rebate under section 40(a)(ia). Detailed Analysis: 1. Disallowance under section 40(a)(ia) on account of sales rebate/discount: The assessee, engaged in the business of importing and trading electronic goods, claimed sales rebate/discount to dealers/distributors. The Assessing Officer (AO) disallowed 30% of the expenditure under section 40(a)(ia) due to non-deduction of tax at source under sections 194C/194H. The Tribunal held that the relationship between the assessee and dealers/distributors was principal-to-principal, not principal-agent, hence sections 194C/194H were not applicable. The disallowance was deleted. 2. Disallowance of volume discount under section 40(a)(ia): The AO treated volume discount as commission, disallowing 30% under section 40(a)(ia) for non-deduction of tax at source under section 194H. The Tribunal found no principal-agent relationship, thus sections 194C/194H were not applicable. The disallowance was deleted. 3. Disallowance in respect of reimbursement of octroi and insurance: The AO disallowed 30% of the reimbursement under section 40(a)(ia), treating it as commission under sections 194C/194H. The Tribunal held that the reimbursement was not commission or a contract for work, thus sections 194C/194H were not applicable. The disallowance was deleted. 4. Disallowance for refurbishing and repairing defective products: The AO disallowed 30% of the expenditure under section 40(a)(ia), treating it as payment for work under section 194C. The Tribunal agreed with the AO, stating that the payment was for a contract for work, thus section 194C was applicable. The disallowance was sustained. 5. Disallowance of provision for sales rebate: The AO treated the provision for sales rebate as commission under section 194H, disallowing a part under section 40(a)(ia) for non-deduction of tax at source. The Tribunal found no principal-agent relationship, thus section 194H was not applicable. The disallowance was deleted. Conclusion: The Tribunal partly allowed the appeals, deleting disallowances under sections 194C/194H for sales rebate/discount, volume discount, and reimbursement of octroi and insurance, while sustaining the disallowance for refurbishing and repairing defective products under section 194C. The provision for sales rebate was also allowed.
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