2005 (7) TMI 306 - AT - Income Tax

Applicability of section 194H - Deduction Of Tax At Source - distribution and commission - survey action u/s 133(A) - maintaining mercantile system of accounting - whether present transaction in reality is principal to agent basis or principal-to-principal basis - HELD THAT - The assessee has made the entries in its books of account debiting commission account as an expenditure and crediting the same to gross revenue account. This cannot be lost sight in view of judgment in the case of State Bank of Travancore v. CIT 1986 (1) TMI 1 - SUPREME COURT . In that case sticky loans, interest were credited to suspense account by debiting to various sundry debtors and interest was not shown as income in the profit and loss account and the claim of the assessee bank, that there is no accrual or arising of the income in such cases. Further on the perusal of sales bill on which Ld. AR has relied upon very strongly. On perusal of the sales bill approximately 80% of the sales are exempt from sales-tax. Therefore an inference cannot be drawn on 20% of the sales on which sales-tax is charged that the transaction is principal-to-principal basis. Moreover invoices not give any terms and conditions which were so advocated by the Ld. AR as enumerated hereinabove. Moreover the charges of sales tax are different for different transactions under particular Sales Tax Act of a State. Sales-tax can be charged and returns are filed in many States on works contract, consignment sale and even on transfer of goods from head office to branch office. Moreover the sales bill is in the capacity as customer or consignee has not been made clear on the sales bill. Further the payment is to be made on fortnightly basis, as is evident from sales bills. But it has not been brought on record, whether the sales price collected from retailer is send to the assessee after deducting commission or indirectly said to be margin of profit or the distributor has the right to use that money to his advantage or benefit. Whether the distributor have their own warehouses or godowns and sells them as an owner has also not been brought on record. Without bringing on record any material, a said statement that closing stock belongs to distributor, is of no value. Since it is evident from papers found in survey, the distributor is entitled for commission only and hence his right to collect the money from retailer cannot be to retain the same but send the same to the assessee. There is an old section 194H which is in pari materia with the present section 194H. On perusal of Explanation to section 194H, it is evident that not only directly even indirectly any payment received by the assessee or any payment received for any services in the course of buying or selling of goods or where any income is credited to any account called by any other name in the books of account of the person liable to pay such income, such crediting shall be deemed to credit or such income to the account of the-payee and the provisions of this section shall apply accordingly. Thus, we also do not agree with the submission made by the Ld. AR that according to the CBDT Circular No. 275/201/95, dated 29-1-1997 a person responsible to deduct tax cannot be regarded as an assessee in default in respect of payment of any amount if the payee has already paid taxes in respect of such income. Thus keeping in view in the reality of transaction, own action of the assessee, explanation of section 194H, Circulars of CBDT and decision in the case of State Bank of Travancore, we are of considered view that tax at source should have been deducted u/s 194H by the assessee. Without repeating the same, the same are hereby sustained alongwith the reasons mentioned therein. In other words, the relationship between the assessee company and its distributor is principal and agent basis and the assessee was entitled to deduct the TDS on commission which he failed to do so. In the result, both the appeals of the assessee are dismissed.

Issues Involved:
1. Applicability of Section 194H of the Income Tax Act on transactions between the appellant and its distributors.
2. Violation of principles of natural justice by disregarding additional evidence.
3. Validity of the order under Section 201 based on irrelevant considerations.

Issue-wise Detailed Analysis:

1. Applicability of Section 194H of the Income Tax Act:
The primary issue was whether the appellant's transactions with its distributors were subject to deduction of tax at source under Section 194H of the Income Tax Act. The appellant argued that their relationship with distributors was on a principal-to-principal basis, and thus, the provisions of Section 194H, which pertains to commission or brokerage, were not applicable. The appellant contended that the distributors were not agents but independent buyers who bore all risks and rewards of the goods once purchased. The Assessing Officer, however, found that the transactions were more akin to a principal-agent relationship due to several factors:
- The distributors operated under strict control and guidelines set by the appellant.
- Fixed margins and responsibilities were imposed on the distributors.
- The appellant compensated distributors for losses due to price reductions and expired goods.
- Sales executives of the appellant monitored the distributors' operations, and the appellant provided vehicles and other support to the distributors.
- The appellant's accounting entries indicated that distributor commissions were treated as part of gross revenue, suggesting an agency relationship.

The Tribunal upheld the Assessing Officer's view, concluding that the relationship was indeed that of a principal-agent, and thus, the appellant was liable to deduct tax at source under Section 194H.

2. Violation of Principles of Natural Justice:
The appellant claimed that the CIT(A) violated principles of natural justice by disregarding additional evidence submitted under Rule 46A of the Income Tax Rules. This evidence included certificates from distributors stating they were not agents of the appellant. The CIT(A) rejected the additional evidence, reasoning that the statements made by distributors during the survey were more credible and that the subsequent affidavits were likely influenced by legal advice and were afterthoughts. The Tribunal agreed with the CIT(A), noting that sufficient opportunity had been given to the appellant to present its case and that the additional evidence did not alter the fundamental nature of the transactions.

3. Validity of the Order under Section 201:
The appellant argued that the order under Section 201 was based on irrelevant considerations and should be quashed. The CIT(A) and the Tribunal found that the Assessing Officer had correctly interpreted the nature of the transactions and the relationship between the appellant and its distributors. The Tribunal noted that the appellant's own accounting practices and the operational control exercised over the distributors were consistent with an agency relationship. The Tribunal also referred to CBDT Circular No. 619, which clarified that retention of commission by an agent amounts to constructive payment, requiring tax deduction at source.

Conclusion:
The Tribunal dismissed the appeals, holding that the appellant's transactions with its distributors were subject to deduction of tax at source under Section 194H, the principles of natural justice were not violated, and the order under Section 201 was valid and justified. The Tribunal emphasized the importance of the real nature of transactions and the operational control exercised by the appellant over its distributors in reaching its decision.

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