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TMI Blog2011 (12) TMI 84X X X X Extracts X X X X X X X X Extracts X X X X ..... as in the nature of discount and not commission. 2.2 Without prejudice that the CIT(A) erred on facts and in law in not appreciating that since no payment was made by the appellant to the Collection Centres, the provisions of section 194H of the Act, could not, in any case, have been complied with. 3. That the CIT(A) erred on facts and in law in not adjudicating the ground of appeal raised by the appellant assailing the finding of the AO that discount offered by the appellant to Collection Centres was in the nature of payment for 'work' on which tax was deductible under section 194C of the Act." 2. The facts are that for the year under consideration, i.e., assessment year 2006-07, the assessee company filed its return of income declaring nil income after adjustment of brought forward loss of Rs. 8,18,11,190/-. The assessment was completed vide assessment order dated 24.12.08 u/s 143(3) of the Income Tax Act, determining the income at Rs. 25,32,44,857/-. While doing so, the AO made a disallowance of Rs. 16,80,66,667/- concerning discount offered by the assessee company to Collections Centres/Franchisees u/s 40(a)(ia) of the I.T. Act, on the basis that the assessee had n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ises periodical invoices on the Collection Centre; that the Collection Centre, in turn, makes the payment to the assessee after deducting tax at source u/s 194J of the Act for the professional services rendered; that the assessee, in terms of its agreements with the Collection Centres, extends its laboratory testing services at a discounted price, as compared to the standard price list; that the Authorities below have erred in treating the said discount offered by the assessee to the Collection Centres as commission on which tax was required to be deducted u/s 194H of the Act; that the provisions of section 194H of the Act are not attracted, there being no Principal - Agent relationship between the assessee and the Collection Centres; that the Collection Centres act not only for the assessee, but for other laboratories as well; that the choice of laboratory is with the Collection Centre, unless otherwise directed by the patient/customer; that moreover, the Collection Centre charges the customer rates fixed by the Centre itself and not that fixed by the assessee; that the risk of loss or damage of samples during transit is that of the Collection Centre; that the payment of invoice a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and therefore, any obligation to deduct tax at source u/s 194H of the Act even otherwise did not get attracted; that since no payment goes to the Collection Centres from the assessee, there is no question of deduction of any tax at source; that the amount received by the assessee from the Collection Centres is the amount of invoice, net of discount; that this cannot be said to be expenditure incurred by the assessee, liable to attract the provisions of section 40(a)(ia) of the Act; that it has wrongly been held that the transaction/arrangement between the assessee and the Collection Centres is in the nature of "work" for the purpose of Section 194C of the Act; that in the facts of the case, it has not been proved by the Department that the Collection Centres are carrying out any work for and on behalf of the assessee; that the payments received by the assessee from the Collection Centres are for rendering of professional services by way of testing of samples, subject to with-holding of tax u/s 194J of the Act; that if the Collection Centres were carrying out any work for and on behalf of the assessee, no tax would have been required to be withheld by the Collection Centres u/s 194J ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... set, it would be appropriate to reproduce the provisions of section 194H:- "194H. Commission or brokerage. Any person not being an individual or a Hindu undivided family, who is responsible for paying, on or after the 1st day of June, 2001, to a resident, any income by way of commission (not being insurance commission referred to in section 194D) or brokerage, shall, at the time of credit of such income to the account of the payee or at the time of payment of such income in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon at the rate of ten per cent : Provided that no deduction shall be made under this section in a case where the amount of such income or, as the case may be, the aggregate of the amounts of such income credited or paid or likely to be credited or paid during the financial year to the account of, or to, the payee, does not exceed five thousand rupees : Provided further that an individual or a Hindu undivided family, whose total sales, gross receipts or turnover from the business or profession carried on by him exceed the monetary limits specified under clause (a) or clause (b) of section 44AB duri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y transaction relating to any asset, valuable article or thing. The element of agency is necessarily to be there in cases of all the services or the transactions contemplated by the section, as held in "Mother Diary India Ltd. v. ITO", 28 SOT 42 (Del), "Delhi Milk Scheme v. CIT", 173 Taxman 54 (Del), and "ABP Pvt. Ltd. v. CIT", 23 SOT 28 (Kolkata). 9. Where the dealing between the parties is not on a Principal to Agent basis, Section 194H does not get attracted, as held in "Ahmedabad Stamp Vendor Association v. Union of India", 257 ITR 202 (Guj), "Kerala Stamp Vendors Association" 282 ITR 7(Ker) and "ACIT v. Samaj", 77 ITD 358 (Cuttack). 10. In the present case, the business working of the assessee is that it signs agreements with the Collection Centres, on a non-exclusive basis. It is under these agreements, that the Collection Centres avail the professional services of the assessee regarding testing of samples. These Centres operate as authorized Collectors for collecting the samples. Now, these Collection Centres are working in this manner with various concerns, of which, the assessee is one. The Collection Centre is under no obligation to always forward these samples to the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction Centres, has not been considered to be deductible expenditure. 12. In "CIT v. Jai Drinks Pvt. Ltd.", under similar circumstances, similar payments made by "Jai Drinks", to its distributor, were held to be incentives and discounts and not commission. The distributor had been permitted to sell its product in a specified area exclusively. It was as per the agreement that the distributor was to purchase the products of Jai Drinks and was to be allowed discount per case on the printed maximum retail price. The breakage, leakage, etc., was the liability of the distributor and not that of Jai Drinks. All the approvals, consents, registration, licence, etc., required from Departments or Authorities were to be obtained by the distributor. The purchase of the products by the distributor from Jai Drinks was against one hundred per cent advance payment or, at times, on credit, at the discretion of Jai Drinks. No element of Principal - Agent relationship was found to exist, as is the case herein. 13. The ld. CIT(A) has observed that the submission of the assessee that it provided professional services in the form of medical diagnostic services to the Collection Centres, was not acceptab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion was imposed simply to prevent the Collection Centres from divulging the assessee's specific and confidential know-how which may have come to their notice during their engagement with the assessee, to the competitors of the assessee. This contention has neither been rebutted, nor can be thrown out neck and crop. This is a perfectly plausible explanation. Prudence demands the imposition of such-like restrictions in the agreement so as to safe-guard the assessee's interests. Further, as contended, it has not been shown that there is any restriction on the Collection Centres from continuing to act as such Collection Centres. The assessee has only sought to prevent the Collection Centres from collaborating with the competitors of the assessee. In the event of absence of such a covenant in the agreement, there would be no safe-guard against the Centres divulging the assessee's confidential specific know-how to its competitors, thereby prejudicing the assessee's business. And not only this, the mere existence of such alleged restriction does not, by itself, establish a Principal - Agent relationship between the assessee and the Collection Centres. In this regard, in "B ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce list provided by the assessee to the Collection Centres. In this regard, attention has been drawn to pages 96 to 98 and 99 to 102 of the Assessee's Paper Book. 18. Apropos this issue, it is seen that APB 96 shows that Sapra Diagnostic Centre, a Collection Centre, bearing Code No. P 00000075/, is charging Rs. 975/-against SRL DOS price of Rs. 915/-. APB 97 is a copy of receipt issued by Sapra Diagnostic Centre to whom Khanna Renu, for payment of Rs. 975/- for various medical tests. Then, APB 98 contains the copy of price list (Systems) of the assessee, as on 17.12.09. This list reads as follows:- Test Code Test name SRL Test Price (Rs) 5111 CBC+PS+ESR 285 1302H Fasting Blood Sugar 60 1302 Glucose PP 60 1209AD Coronary Risk Profile, Serum 390 1310H URIC ACID, Serum 120 Total 915 19. Further, APB 99 to 102 contain the relevant extracts of the standard price list of the assessee. All these documents were placed before the Authorities below. In the impugned order, however, the ld. CIT(A) has not taken those into consideration. In fact, no reference whatsoever has been made to this documentary evidence. Therefore, the contention of the assessee regard ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Rs. 50.42 crores, which stands reflected in the books of account of the assessee. 23. Then, the disallowance in terms of section 40(a)(ia) read with section 194H of the Act can be made only in respect of expenditure in the nature of commission paid/credited to the account of the recipient, or to any other account. In the present case, the assessee receives the amount of the invoice raised, net of discount, from the Collection Centres. This, discount, indisputably, cannot, in any manner, be said to be expenditure incurred by the assessee and so, section 40(a)(ia) of the Act is not attracted. 24. In "United Exports v. CIT", 330 ITR 549(Del), it was held, with reference to section 40A(2)(b) of the Act, that since trade discount offered by the assessee could not be said to be expenditure incurred, there was no question of disallowance under the said section. 25. From this angle also, the Authorities below erred in disallowing the discount offered by the assessee, by invoking the provisions of section 40(a)(ia) of the Act. 26. Coming to the case laws referred to on behalf of the Department, these are as follows:- 1. "CIT v. Singapore Airlines Ltd.", 319 ITR 29 (Del); 2. "CIT v. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he nature of commission/brokerage, warranting deduction of tax at source under section 194H of the Act. 32. Apropos "CIT v. Director, Prasar Bharti", (supra), it was held that under the advertising trade too, the advertising agencies, which are accredited with Advertising Standards Council of India (ASCI), release advertisements to the media (print or electronic) and are entitled to commission from the media. The advertising agencies which receive payment from the advertisers retain the commission and pass on the balance to the media. Tax is deducted under section 194H of the Act on the amount of commission retained by the advertising agency, in view of the admitted Principal - Agent relationship between the media and the advertising agency. 33. In the facts of the given case, it was observed that the advertising agency was an agent for Prashar Bharti, considering that the agent was entrusted to canvass advertisement on behalf of Doordarshan, the advertisement charges recovered from the customers were also in accordance with tariff prescribed by Doordarshan, which was incorporated in the agreement, the advertisement material had to conform to the discipline introduced by Doordars ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7. It was observed that looking at the facts of the case, namely, that the ownership of the milk booth rests with the assessee who does not charge any rent for the use of the booths from the concessionaires; the unsold milk is taken back by the assessee from the concessionaires who are prohibited from selling any other product of any other brand; the sale collections of the concessionaires are collected in cash by the assessee from concessionaires on a daily basis, there can be no doubt that the concessionaires are selling milk for and on behalf of the assessee and were being paid a commission for it. 38. On the basis of the aforesaid undisputed facts, it was held by the Hon'ble High Court, confirming the decision of the Tribunal, that the commission paid to the agents for the goods sold attracted the mischief of section 194H of the Act. 39. In the present case, however, the collection centre has its own premises, infrastructure, staff and necessary licenses/approvals. The collection centre acts as an authorized collector for collecting samples and avails the professional services of the appellant with respect to testing of samples and issue of necessary reports. The assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... other hand, is not one of sale of goods, but one of rendering of services. The assessee renders diagnostics services to the collections centers against payment, on which necessary tax is deducted at source u/s 194J of the Act. There is no element of agency between the assessee and the collection centers. 'Bharti Cellular' (supra), therefore, has no application whatsoever to the facts of the present case. 43. Apropos "Hindustan Coca Cola Beverages" (supra), it has been submitted on behalf of the assessee that the Hon'ble Rajasthan High Court has, vide order dated 25.08.2005 (copy placed on record) stayed the operation of the aforesaid decision, holding the same as not being in accordance with the law laid down by the apex court. 44. Moreover, in the said, case, it was found during survey that the assessee had credited 'commission' to the account of the distributors in its books of account. It was further found that (a) loss due to reduction in price and due to expiry of goody was borne by the assessee; (b) the assessee met expenses on diesel and petrol, vehicle repair salary of salesmen, etc., incurred by the distributors in certain cases; (c) the assessee had ..... X X X X Extracts X X X X X X X X Extracts X X X X
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