2025 (4) TMI 1352 - AT - Income Tax

TDS u/s 194H - commission payments to franchisees/LFS - AR submitted that Section 194H has no applicability in the present facts as the assessee is not a person responsible for making any payment to the franchisees or LFS HELD THAT - The agreement entered into between the assessee and the franchisees/LFS establishes a principal-to-principal relationship. The franchisees/LFS are not agents of the assessee. Relevant terms of the agreement are annexed as Annexure A to the Synopsis of Arguments. The transaction between the assessee and the franchisees/LFS is a sale on a principal-to-principal basis. Section 194I treating the discounts offered to LFS as rent for occupation of a demarcated space within the LFS premises - On Applicability of Section 194-I the assessee contended that the discount allowed to LFS cannot be considered as rent. The allegation of the AO that the assessee acquires possession or control over a specified demarcated area within the premises of the LFS stores and that its employees use the space exclusively for its business purposes is factually incorrect and unsustainable. As per the agreement between the assessee and the LFS entities the assessee merely sells goods to the LFS who in turn display and sell the goods to end customers. For the purpose of facilitating sales the assessee may at times depute its employees to be present on the store floor to assist customers. However the employees do not possess or control the premises. LFS retains full possession and operational control. The fact that a brand-dedicated area is used for display of goods does not lead to the inference that the assessee has possession or control over that space. The employees of the assessee are neither entitled to exclusive use of such space nor do they have independent access or rights thereto. No fixed or identifiable area is earmarked in the agreement and the LFS has complete discretion regarding whether to display the goods or not. Therefore the invocation of Section 194-I of the Act is without merit. Assessee raised invoices in the name of the LFS/franchisees and the LFS/franchisees in turn raised invoices to the end customers. The brand name was merely used to sustain the market position. The transactions are clearly on a principal-to-principal basis and the discounted pricing mechanism adopted by the assessee cannot be considered as payment of commission. No evidence has been placed by the revenue to establish that the assessee has paid any commission to the LFS/franchisees. Further the transactions have been accepted by both the Assessing Officer and the GST Authorities as sales on a principal-to-principal basis. The only objections raised pertain to alleged applicability of TDS under Sections 194H and 194-I which in our considered view and as elaborated hereinabove are not sustainable. No infirmity in the impugned order passed by the Ld. CIT(A). We therefore see no reason to interfere with the same. In the result the appeal filed by the revenue is dismissed.

Summary

The core legal questions considered by the Tribunal in this matter are as follows:

1. Whether the transactions between the assessee company and its channel partners (franchisees, Large Format Stores (LFS), e-commerce platforms, and Company-Owned Franchisee-Operated (COFO) stores) are on a principal-to-principal basis or principal-to-agent basis, thereby determining the applicability of tax deduction at source (TDS) under Section 194H of the Income-tax Act, 1961 (the Act).

2. Whether the discounts or margins retained by the channel partners amount to commission payments requiring TDS deduction under Section 194H of the Act.

3. Whether the arrangement involving use of demarcated areas in LFS stores by the assessee amounts to a lease or rental arrangement under Section 194I of the Act, necessitating TDS deduction on rent payments.

4. Whether the retention of commission by the channel partners amounts to constructive payment requiring TDS deduction as per CBDT Circular No. 619 dated 04-12-1991.

5. The effect of the assessee's recognition of revenue in its books in accordance with Accounting Standard 9 on the nature of the transaction and the applicability of TDS provisions.

6. The relevance and applicability of various judicial precedents, including the Supreme Court decision in Bharti Cellular Ltd. vs ACIT, and other High Court decisions, in determining the nature of transactions and TDS liability.

Issue-wise Detailed Analysis

1. Nature of Transaction: Principal-to-Principal vs. Principal-to-Agent (Applicability of Section 194H)

Legal Framework and Precedents: Section 194H mandates TDS on commission or brokerage payments made by a person to a resident. The key legal question is whether the payments or discounts retained by channel partners constitute commission requiring TDS deduction. The Supreme Court decision in Bharti Cellular Ltd. vs ACIT and other High Court rulings provide guidance on distinguishing principal-agent relationships from principal-to-principal sales.

Court's Interpretation and Reasoning: The Tribunal examined the business model of the assessee, which involves sale of branded garments through multiple channels on a "Sale or Return" (SOR) basis. The assessee raises invoices and charges GST on the transfer of goods to channel partners, who have the right to return unsold goods. The Tribunal noted that ownership of goods passes to the channel partners upon sale, supported by the fact that the franchisees/LFS sell goods in their own name and bear responsibility for the goods post-delivery.

The Tribunal referred to contractual clauses showing that the franchisees/LFS have control over the goods once delivered, and the assessee does not exercise control akin to an agent-principal relationship. Restrictions such as MRP fixation, store design, and marketing standards were held insufficient to convert the transaction into an agency relationship.

Key Evidence and Findings: The agreements between the assessee and channel partners, GST compliance, invoicing practices, and the right to return unsold goods were pivotal. The Tribunal relied on the absence of any clause indicating that channel partners hold money in trust or act as agents. The presence of GST charged on the initial transfer was significant to establish sale rather than agency.

Application of Law to Facts: The Tribunal applied the principle that the substance of the transaction governs its tax treatment, not merely form or accounting standards. It found that the transactions constitute sales on principal-to-principal basis, not commission-based agency arrangements, thus Section 194H is not attracted.

Treatment of Competing Arguments: The revenue argued that channel partners act as agents receiving margins as commission, supported by control over pricing and possession of goods. The Tribunal rejected this, holding that the franchisees/LFS bear commercial risks and responsibilities consistent with ownership. The assessee's reliance on GST invoicing and absence of payments to channel partners was accepted.

Conclusions: The Tribunal concluded that the transactions are sales on principal-to-principal basis and no commission payments are made requiring TDS deduction under Section 194H.

2. Retention of Margins by Channel Partners as Constructive Payment (CBDT Circular No. 619)

Legal Framework: CBDT Circular No. 619 clarifies that retention of commission by an agent amounts to constructive payment requiring TDS deduction by the principal.

Court's Reasoning: The revenue contended that margins retained by channel partners are commission income, thus TDS is applicable. The Tribunal, however, found no evidence of commission payments or agency relationship. The margins arise from discounted sale prices, not commission for services rendered.

Application: Since the transactions are sales, the concept of constructive payment of commission does not apply. The Tribunal held the retention of margins by channel partners is not commission income but part of sale consideration.

Conclusion: CBDT Circular No. 619 is not applicable as there is no agency or commission payment.

3. Applicability of Section 194I on Use of Demarcated Space in LFS Stores

Legal Framework: Section 194I requires TDS on rent payments for use of land or building, including any payment under lease, sub-lease, tenancy or any other agreement for use of such property.

Court's Interpretation: The revenue argued that the assessee's employees occupy demarcated areas in LFS premises, constituting rent. The Tribunal analyzed the agreements and factual matrix, noting that the LFS retain possession and operational control of premises. The presence of brand promoters or employees of the assessee on the floor was for sales assistance only, without exclusive possession or rights.

Key Findings: No fixed demarcated space was exclusively controlled or leased by the assessee. The arrangement was for sale of goods, not lease of premises. The Tribunal referred to precedents holding that mere use or presence without possession does not amount to rent.

Application of Law: The Tribunal applied the definition of rent under Section 194I and found the arrangement outside its ambit.

Conclusion: No TDS liability under Section 194I arises from the arrangement.

4. Effect of Accounting Standards and Revenue Recognition on Nature of Transaction

Legal Framework: The Supreme Court has held that the method of accounting or revenue recognition does not determine the true nature of a transaction.

Court's Reasoning: The Tribunal noted that the assessee's recognition of revenue in line with Accounting Standard 9 and GST compliance supports the characterization of sale. However, the Tribunal emphasized substance over form, relying on the legal nature of transactions rather than accounting treatments.

Conclusion: Accounting treatment alone cannot alter the legal character of the transaction.

5. Treatment of Competing Judicial Precedents

Revenue's reliance: The revenue cited decisions such as Delhi Milk Scheme v. CIT and Singapore Airlines Ltd. v. CIT to support agency and TDS applicability.

Tribunal's analysis: The Tribunal distinguished these cases on facts, noting absence of agency clauses, trust arrangements, or commission payments in the present case. It relied on Bharti Cellular Ltd. and other High Court decisions holding that restrictions imposed by a principal do not convert sale into agency.

Conclusion: Precedents favor the assessee's position of principal-to-principal sales.

6. Consistency and Acceptance by Revenue

The Tribunal noted that the revenue had accepted the assessee's income from sales in earlier assessments without invoking TDS provisions. The principle of consistency was invoked to reject the revenue's changed stance.

Significant Holdings

"The relationship between the Respondent-assessee and its channel partner is on principal to principal."

"Merely because the agreement has clause for return of goods does not deter from the fact that originally when the goods are supplied by the assessee to the channel partners, there is a sale of goods."

"The presence of certain restrictions on franchisees/LFS-such as MRP control, brand d'ecor, marketing standards, and submission of accounts-does not alter the character of the transaction."

"The assessee is not liable to deduct tax at source under Section 194H or Section 194I of the Act."

"Retention of commission by an agent amounts to constructive payment on which TDS is required to be deducted by the principal"-CBDT Circular No. 619 is not applicable here as there is no agency or commission.

"The arrangement involving use of demarcated areas in LFS stores does not amount to rent under Section 194I as the assessee does not have exclusive possession or control over the premises."

"Accounting standards and revenue recognition do not determine the true nature of the transaction."

The Tribunal dismissed the revenue's appeals for all relevant assessment years, upholding the orders of the Commissioner of Income-tax (Appeals) and confirming that the transactions between the assessee and its channel partners are sales on principal-to-principal basis, not attracting TDS under Sections 194H or 194I of the Act.