2023 (6) TMI 1217 - AT - Income Tax

TDS u/s 194H - Discount or Commission - Demand u/s. 201(1) / 201(1A) - credit notes and gold coins offered on annual rebate to selected dealers upon achieving targets - assessee submitted that credit notes were given in order to promote the sales - AO held that such credits were in the nature of commission which would require TDS - HELD THAT - For applicability of TDS obligation u/s 194H there should exist agency relationship between the payer and the payee. The payee should act as on agent for the assessee. From the fact it emerges that the assessee sells its products through network of dealers / distributors under a commercial agreement. As per the terms the risk and rewards of sale transaction pass on to these dealers at the point of time of sale only. The assessee merely regulates business terms for the purpose of sale. Nevertheless the sale happens on principal-to-principal basis only. Fixed rebates are generally reduced from the invoice and only net sale consideration is shown in the financial statements. Variable rebates are based on sales quantity or on achievement of sales targets - Dealers / distributors do not act on behalf of the assessee rather they act on independent basis subject to business terms laid down by the assessee. The risk and reward of goods get transferred at the time of sale by assessee to these dealers. The documents as placed on record substantiate all these facts. The decision in the case of CIT vs. Ahmedabad Stamp Vendors Association 2012 (9) TMI 298 - SC ORDER supports the case of the assessee as held that discount given to stamp vendors for purchasing stamps in bulk quantity was in the nature of cash discount in transaction of sale and therefore section 194H would have no application to that transaction.There was no obligation on assessee to deduct TDS on rebates given on transaction of sale. Accordingly impugned demand for both the years stands deleted. Decided in favour of assessee.

Summary

Issues involved:
The judgment involves the issue of demand raised under section 201(1) / (1A) for lack of tax deduction at source (TDS) on payments in the nature of rebates given by the assessee to its dealers / distributors for Assessment Years 2018-19 & 2019-20.

Details of the judgment:
Issue 1:
In Assessment Year (AY) 2018-19, the assessee faced demands u/s. 201(1) / 201(1A) due to not deducting TDS on rebates given to dealers. The Commissioner of Income Tax (Appeals) upheld the demands, citing the principal-agent relationship between the assessee and dealers based on the agreement terms.

Issue 2:
The CIT(A) observed that the dealer agreement indicated a principal-agent relationship, where the dealer acted on behalf of the assessee. The dealer had to follow the instructions of the assessee, and the activities of the dealer were under the control of the assessee, leading to the conclusion that the rebates were akin to commission liable for TDS under section 194H.

Issue 3:
The CIT(A) further held that the rebate given as credit notes reduced the dealer's receivable balance and purchase cost, but this did not negate the requirement to deduct TDS. The CIT(A) emphasized that TDS is a machinery provision for collecting tax on potential income, and the appellant had the duty to deduct TDS as the person making the payment.

Issue 4:
In the final adjudication, the tribunal found that there was no agency relationship between the assessee and dealers, as the dealers operated on a principal-to-principal basis. The tribunal referenced the Supreme Court's ruling in a similar case to support the assessee's position that TDS was not required on rebates given for sale transactions.

Conclusion:
The tribunal allowed both appeals, ruling in favor of the assessee and deleting the impugned demands for both years based on the absence of an agency relationship and the nature of the rebates given to dealers in the sale transactions.

Order pronounced on 27th June, 2023.