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TMI Blog2015 (8) TMI 655X X X X Extracts X X X X X X X X Extracts X X X X ..... avour of assessee. Short deduction of tax on payments made under the head “Brand fee” - payment of Royalty or not - TDS u/s 194J or 194C - Held that:- Though the Ld A.R tried to contend that the entire payment could not be considered as payment of royalty, yet no material was placed to substantiate the said contentions. If the contention of the Ld A.R that the amount transferred by way of “brand fee” was actually a transfer of business profits is to be accepted, it has to be shown that the property and risk attached with the products remained with the contractee. - there is no infirmity in the action of the tax authorities in treating the payment of ‘brand fee’ as payment of royalty falling within the scope of sec. 194J of the Act. - Decided against assessee. CIT(A) has already set aside the matter relating to demand raised u/s 201(1) of the Act to the file of the AO with the direction to cancel the demand raised, if it is shown that the recipients have declared the same as their respective income. The Ld CIT(A) has also directed the AO to restrict the interest chargeable u/s 201(1A) of the Act till the date of payment of tax by the recipients. The above directions are in accordanc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he revenue would incur loss on account of lapse by the Tax Deductor. 5) The Lower Authorities, in the light of evidences brought on record to show that no arrears of taxes were due from the tax deductees in respect of relevant assessment year, particularly in the light of evidence brought on record to show that Tax deductees have filed IT Returns and paid taxes on the incomes admitted. 6) The C.I.T.(A) is not justified in treating the contractual payments made to M/s. United Breweries Ltd., Bangalore and M/s. Millennium Breweries Industries Ltd., Bangalore on which T.D.S. was deducted U/s.l94C of the IT Act, as payments made to the respective companies as Royalty payments and there after uphold the action of the Income tax Officer (T.D.S.) in determining short deduction of T.D.S. by applying provisions of section 194J of the IT Act. 7) The C.l.T.(A), while upholding the levy of Interest U/s.201(1A) of the IT Act by I.T.O., T.D.S., ought to have directed I.T.O., T.D.S., Ward-6(1) to restrict the levy of Interest U/s.201(1A) till the date of filing IT Returns by Tax Deductees, following the Boards Circular No.275/20l/95 Dt:29-01 1997." Identical grounds have been raised in other t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee 2008-09 10,32,37,0207- 1,03,99,7717- NIL 36,14,389/- 2009-10 10,65,27,7077- 1,09,72,3537- NIL 24,63,0627- 2010-11 5,86,47,6307- 59,17,8157- NIL 6,13,4067- 3.1 Besides, the AO also noted that the assessee-deductor has made certain payments by way of royalty for brand use, in respect of which the assessee-deductor has effected TDS in terms of section 194C, though it is required to deduct TDS in terms of section 194J of the I.T. Act. The said payment was made in terms of Brewing and Distribution agreement, referred earlier. As a result, the assessee-deductor was held to be in default for short deduction under section 201(1) and levied interest u/s.201(1A) as follows:- A.Y. Brand fee Short deduction u/s.201(1) Interest u/s.201(1A) 2008-09 9,13,64,139 79,84,844 27,55,997 2009- 2010 4,17,26,245 37,82,069 9,95,907 2010-11 2,26,48,247 20,12,125 2,56,894 4. The facts relating to the Non-deduction of TDS on payments made under Trade Discount Scheme have been discussed as under by Ld CIT(A):- "3.5 From the information gathered during the survey, the AO noted that the assesseedeductor has paid ₹ 10,32,37,0207- in F.Y.2007-08; ₹ 10,65,27,707 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessee's case, the above discounts were not reflected in the invoices raised by the tax deductor. The AO also noted that the benefit of these 'trade schemes' has not been passed to the end users i.e., retail purchaser. Therefore, the AO came to the conclusion that what-ever be the nomenclature used by the tax deductor as the payments are made for the services rendered to the tax deductor in the course of selling of its goods the provisions of section 194H would be applicable. The AO, accordingly, found the assessee to be in default u/s.201(1) and u/s.201(1A) of the I.T.At for the amounts aforestated. ……. 3.12 The assessee is a contract manufacturer for M/s. United Breweries Ltd and M/s. Millenium Beer Industries Ltd and manufactures beer as per the specifications given. As per the Brewing Agreement entered with the principals, the assessee is required to manufacture beer and dispose of to State Beverages Corporation under the Trade name and brand labels specified by the principal. The beer manufactured are sold to the APBCL as per Rate contract agreement entered with APBCL. Under the terms of such contract, the price for the beer supply with APBCL is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssion payments, since the payments have been made on principal to principal basis. The assessee placed reliance on the decision rendered by Visakhapatnam bench of Tribunal in the case of Pearl Bottling (P) Ltd in this regard. The assessee also placed reliance on the decision rendered by Hon'ble Delhi High Court in the case of Jai Drinks Ltd (2011)(336 ITR 383) and also hosts of other Tribunal decisions, all of which have been rendered in that context, i.e., it has been held that the existence of Principal Agent relationship is a mandatory requirement to treat the payments as Commission. The assessee contended that there is no principal agency relationship between the assessee and the retail dealers as the sales to them are effected to APBCL. Accordingly it was contended that the payment is not covered within the purview of 'commission or brokerage'. 6. The Ld CIT(A), after examining the contentions of the assessee held as under:- "3.25 I have considered the pleas raised. All the above decisions are not applicable to the facts of this case. In all the above cases the element of 'discount' was paid against the sale price, and the transaction clearly fall within the purview ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ave opened separate bank accounts for this purpose. He submitted that the said agents would collect the details of sales effected by each of the dealers and compute the incentive payable to the retail dealers as per the Scheme. On receipt of the said details, the assessee would transfer funds to the separate bank account of the del-credere agents, who in turn, would make payment to the concerned retail dealers. Accordingly, he submitted that the del-credere agents have acted as conduit only for disbursing the incentives to the retail dealers. Accordingly he submitted that the assessee has paid the amount under Trade discount scheme to the retail dealers on "Principal to Principal" basis and hence they cannot fall in the category of "Commission" payments. The Ld A.R also carried us through the documents placed in the paper book to explain the methodology followed by the assessee for disbursing the incentive payments under Trade discount scheme to the retail dealers. 8. In this regard, the ld A.R. placed reliance on certain case laws. He invited our attention to the decision rendered by Hon'ble Gujarat High Court in the case of Ahmedabad Stamp Vendors Association Vs. Union of India, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... R. also placed reliance on the decision rendered by Cochin Bench of the Tribunal in the case of ACIT vs. Al Hind Tours & Travel (P) Ltd., (2013) 29 taxmann.com 294 (Cochin- Trib), wherein, the Tribunal considered the issue whether the discount paid by an Airline agent to a retail customer or group customers would constitute commission. The Tribunal held that the retail customers and group customers were not providing any service to the assessee and were only getting flight tickets at a concession from the assessee. Hence such customers could not be considered as agents of the assessee and hence, the discount paid by the assessee cannot be considered as commission. 11. The Ld D.R, on the contrary, submitted that the assessee has made the payment under trade discount scheme to the del-credere agents and they have provided services to the assessee in connection with the promotion of sales. Hence, the said payments fall in the category of Commission liable for deduction u/s 194H of the Act. When it was pointed out that the assessee has deducted TDS u/s 194H of the Act on the payment made to del-credere agents for the services rendered by them and the impugned payment has been given to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... over of the assessee. In order to market trade discount scheme and also in order to promote sales of its products, the assessee has appointed del-credere agents. There is no dispute with regard to the fact that the payment made to delcredere agents for the services provided by them to the assessee is treated as commission by the assessee and TDS has been deducted under section 194H of the Act from them. The incentives payable under the trade discount scheme was disbursed by the assessee to the retail dealers through del-credere agents who have opened separate bank accounts for the said purposes. Accordingly, it was submitted by the assessee that del-credere agents have acted as conduit for transferring incentives to the retail dealers and hence the Ld CIT(A) was not justified in holding that the payments have been made to del-credere agents. 14. At this juncture, we may gainfully refer to the decision rendered by the Hon'ble Supreme Court in the case of Bhopal Sugar Industries Ltd Vs. STO AIR 1977 Supreme Court 1275, wherein the Hon'ble Apex Court has explained about "Contract of sale" and "Contract of Agency". The head notes of the said judgment are extracted below:- "In a c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lude any payment receivable, directly or indirectly, for services in the course of buying or selling of goods and that, therefore, the discount availed of by the stamp vendors constitutes commission or brokerage within the meaning of section 194H. If this contention were to be accepted, all transactions of sale from a manufacturer to a wholesaler or from a wholesaler to a semi wholesaler or from semi wholesaler to a retailer would be covered by section 194H. To fall within the aforesaid Explanation, the payment received or receivable, directly or indirectly, is by a person acting on behalf of another person (i) for services rendered (not being professional services), or (ii) for any services in the course of buying or selling of goods, or (iii) in relation to any transaction relating to any asset, valuable article or thing. The element of agency is to be there in a case of all services or transactions contemplated by Explanation (i) to section 194H. If a car dealer purchases cars from the manufacturer by paying price less discount, he would be the purchaser and not the agent of the company, but in the course of selling cars, he may enter into a contract of maintenance during the wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... recompense or reward for the services rendered. 15. The assessee has contended before the Ld CIT(A) that the incentives paid by it under Trade discount scheme is in the nature of discount. However, the Ld CIT(A) has expressed a view in paragraph 3.15 to 3.17 of his order that the "discount" given by the assessee would go to reduce the price of the product and in the instant case, the assessee has sold to APBCL and there is no adjustment made in the sale price towards discount. The Ld CIT(A) appears to have entertained the view that the discount should necessarily be adjusted against sale price. However, the Hon'ble Bombay Court in the case of Harihar Cotton Pressing Factory (supra) has clarified that the "rebate" (akin to "discount") need not be immediate, but can be handed back to the payer after receipt of payment also. Further, the Ld CIT(A) has also referred to the meaning of the term "Discount" explained by the CBDT in the context of Fringe Benefit Tax in para 3.16 of his order. The CBDT has clarified that the bonus points given to credit card customers are in the nature of deferred sales discount. The decision of Hon'ble Bombay High Court and the CBDT circular makes it clea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see and retail dealers. The trade discount scheme was announced by the assessee in order to promote its sales and hence it is a sales promotion scheme only. Under the scheme, the assessee has disbursed the eligible amount of incentive or rebate or discount to the retail dealers through its del-credere agents. Hence the del-credere agents cannot be considered to "Payees" in these transactions as interpreted by Ld CIT(A), since they have acted only as conduits. The payment is actually made to the retail dealers. Accordingly, we are of the view that the payment made by the assessee under such scheme would constitute sales promotion expenses and it would not fall under the category of commission falling within the scope of section 194 H of the Act. 18. In view of above, we set aside the order of the ld CIT(A) on this issue and direct the AO to delete the demand raised in respect of this issue under section 201(1) and 201(1A) of the Act in respect of all the three assessment years under consideration. 19. The next issue relates to short deduction of tax on payments made under the head "Brand fee". The facts relating to this issue are set out in brief. The assessee herein possessed man ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee as "brand fee", it had deducted tax at source u/s 194C of the Act by treating the same as Contract payment. However the assessing officer took the view that the "brand fee" is in the nature of royalty for use of brand name and hence the tax should be deducted u/s 194J of the Act. Since the rate at which the tax is required to be deducted u/s 194C is lower than the rate prescribed u/s 194J of the Act, the assessing officer treated the assessee as assessee in default in respect of short deduction of tax and raised demand u/s 201(1) and 201(1A) of the Act. The Ld CIT(A) confirmed the order of the AO in principle. However, since the assessee claimed that the payees have declared the brand fee as their income and paid tax thereon, the assessee claimed that the demand u/s 201(1) should not be raised as per the decision of Hon'ble Supreme Court rendered in the case of Hindustan Coco Cola beverages Ltd (293 ITR 266)(SC). The Ld CIT(A) held that the assessee cannot be considered to be in default u/s 201(1) of the Act for the F.Y 2007-08 and 2008-09 subject to verification. For the F.Y 2009-10 also, the Ld CIT(A) directed the AO to verify as to whether the recipient has admitted the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and perused the record. The assessee might have acted as contract manufacturer, but the facts remains that, for all practical purposes, it has declared itself to be the manufacture and has also sold the products under its invoice only. The financial statements prepared by it also vindicate the same. When, for all legal requirements, the assessee has claimed itself to be the manufacturer of beer and has sold it under its own name by using the brand name of main line companies, it is incomprehensible as to how the assessee could claim for the limited purpose of sec. 194J of the Act that it was a mere contract manufacturer manufacturing beers for others. It was not shown to us that the property and risk attached with the manufactured products always remained with the Contractee. Further, we notice that the assessee has claimed to have executed contract for others, whereas, on the payment of 'brand fee', it has deducted TDS u/s 194C of the Act treating the same as contract payment, as if it has entrusted the contract to the main line companies. Hence the payment made to the brand owners under brewing agreement cannot be a contract payment falling under the scope of sec. 194C of the Ac ..... X X X X Extracts X X X X X X X X Extracts X X X X
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