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TMI BlogAgency or Principal-to-Principal Basis? The Taxing Dilemma in Business TransactionsX X X X Extracts X X X X X X X X Extracts X X X X ..... Agency or Principal-to-Principal Basis? The Taxing Dilemma in Business Transactions X X X X Extracts X X X X X X X X Extracts X X X X ..... * Deduction of TDS on Commission and Brokerage under Section 194H of the Income Tax Act Thus, it becomes very crucial to correctly determine the nature of relation between the contracting parties. The Hon'ble Supreme Court recently in the case of UNION OF INDIA & OTHERS VERSUS FUTURE GAMING SOLUTIONS PVT. LTD. & ANOTHER ETC. - 2025 (2) TMI 483 - SUPREME COURT in a detailed judgement analyzed this distinction while referring to various judicial decisions on this issue. The point for determination before the Supreme Court was whether a lottery distributor is an agent of the State Government or is acting on principal-to-principal basis. If the lottery distributor is an agent, service tax can be levied on the commission. However, if lo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ttery distributor acts on principal-to-principal basis, taxing the transaction will be out of the ambit of the legislative power of the Parliament. The agreements considered by the Court included agreements where the lottery distributor was described as "marketing agent" for marketing/selling of lotteries on behalf of the State. The agreement also explicitly stated that the relationship between the parties is one of Principal and Agent. The relevant extract of the said clause is as under: "23. RELATIONSHIP BETWEEN MARKETING AGENT AND THE STATE GOVERNMENT The relationship between the marketing Agent and the Government will be one of Principal and Agent as defined in the Indian Contract Act, 1872 as amended." Despite such explicit claus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e, the Court reached the conclusion that the Lottery Distributors are not agents of the State Government and thus the consideration received/retained by them is not leviable to service tax. The Supreme Court laid down that the conclusive test is whether the property in goods passes to the recipient who can further sell the goods at whatever price he thinks fit and bears the risk and reward of the further sale. The Court further held that the label put by the parties is not conclusive. The whole agreement has to be looked into to determine the substance of the transaction and the rights and liabilities of the parties. Concept of Agency under the Contract law The term "agent" and "principal" are defined in Section 182 of the Contract Act, 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 872 as under: 182. "Agent" and "principal" defined.- An "agent" is a person employed to do any act for another, or to represent another in dealings with third person. The person for whom such act is done, or who is so represented, is called the "principal". Cheshire, Fifoot and Furmston on the Law of Contract (Fourteenth Edition) succinctly explains the concept of agent as under: "Agency is a comprehensive word which is used to describe the relationship that arises where one man is appointed to act as the representative of another. ... an agency agreement is one by which the agent is authorised to establish privity of contract between his employer, called the principal, and a third party. ... A contract made with a third party by the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gent in the exercise of his authority is enforceable both by and against the principal. Thus the English doctrine is that an agent may make a contract for his principal which has the same consequence as if the latter had made it himself. In other words the general rule is not only that the principal acquires rights and liabilities, but also that the agent drops out and cease to be a party to the contract. Thus, the distinguishing feature between a contract of agency and any other contract is that the agent creates a privity of contract between the principal and third party and then drops out of the transaction and thus does not bear any risk of loss. Judicial Decisions on Agency The distinction between a contract of sale and a contract ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of agency has been examined in several judicial pronouncements, where courts have emphasized that the true nature of the relationship must be determined based on the substance of the agreement rather than its form. These decisions were referred to by the Supreme Court in Future Gaming Solutions (supra). In THE BHOPAL SUGAR INDUSTRIES LTD. VERSUS SALES TAX OFFICER, BHOPAL - 1977 (4) TMI 151 - SUPREME COURT, the Supreme Court held that mere usage of terms like "agent" or "buyer" is not conclusive in determining whether a transaction is one of sale or agency. The Court emphasized that the key factors include the terms of the agreement, the intention of the parties, and the surrounding circumstances. It was observed that in a contract of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... agency, the agent sells goods on behalf of the principal and does not bear the risk of loss. However, in this case, since the appellant was consuming petroleum products for its own use, it was deemed to be acting as an owner rather than an agent, thereby making the transaction one of sale rather than agency, and hence, not liable to sales tax. Similarly, in SRI TIRUMALA VENKATESWARA TIMBER AND BAMBOO FIRM VERSUS COMMERCIAL TAX OFFICER, RAJAHMUNDRY - 1967 (11) TMI 94 - SUPREME COURT, the Supreme Court reiterated that the essence of a contract of sale is the transfer of title for a price, whereas an agency agreement involves the agent selling goods on behalf of the principal, who retains ownership. The terminology used in the contract i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s not decisive; instead, the relationship must be understood from the nature and terms of the agreement. A similar approach was taken in MOPED INDIA LIMITED VERSUS ASSISTANT COLLECTOR OF C. EX., NELLORE AND OTHERS - 1985 (2) TMI 42 - SUPREME COURT, where the Court held that a commission allowed to dealers was in reality a trade discount, as the dealers purchased mopeds on a principal-to-principal basis rather than acting as agents. This distinction was crucial in determining excisable value. In ALWAYE AGENCIES VERSUS DEPUTY COMMISSIONER OF AGRICULTURAL INCOME-TAX AND SALES TAX, ERNAKULAM - 1988 (5) TMI 329 - SUPREME COURT, the Apex Court examined whether a distributor was acting as an agent or a buyer. It was held that since the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... distributor bore the risk of payment, insured goods, and received a rebate rather than a commission, the transaction was one of sale rather than agency. However, in SNOW WHITE INDUSTRIAL CORPORATION VERSUS COLLECTOR OF C. EX - 1989 (4) TMI 81 - SUPREME COURT, the Supreme Court found that the agreement was for a sole selling agency rather than an outright sale, even though the agreement was described as "agreement for sale". In this case, the most important fact suggesting agency was the clause which enjoined that the stocks left over unsold beyond two years from their receipt could be returned to the appellants who were bound to replace them. Added to it was the fact that any reduction in price during the currency of the agreement wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s to be duly reflected in the price of stock lying unsold with the selling agents, and the obligation that on the termination of the contract by either the appellants or the selling agents, unsold stocks lying with the latter were to be returned to the former. Conclusion The distinction between agency and principal-to-principal relationships is not merely a theoretical debate but a crucial factor with significant tax implications under both direct and indirect tax laws. As seen in various judicial decisions, courts have consistently emphasized that the true nature of a transaction must be determined by analysing the substance of the agreement rather than relying solely on its terminology. Ultimately, the courts will look beyond contractu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al labels put by the parties and assess the substance of the transaction by reading the agreement as a whole. Therefore, businesses must carefully evaluate their contractual terms to ensure alignment with their intended relationship and avoid unintended tax exposure. X X X X Extracts X X X X X X X X Extracts X X X X
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