Discount allowed on transactions resulting in outright purchases cannot be treated as brokerage or commission as contained in Sec-194H

ITAT, HYDERABAD BENCHES, HYDERABAD BENCH `B'

ACIT

v.

Idea Cellular Ltd.

ITA No. 289/Hyd/2005

February 26, 2009

RELEVANT EXTRACTS:


12. We have carefully considered the submissions of the rival parties and perused the material available on record. We find that the facts are not in dispute. Under section 194H of the Act any person not being an individual or a Hindu undivided family who is responsible for paying on or after the first day of June 2001 to a resident any income by way of commission 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 specified rate. The term 'commission or brokerage' has been defined in the Explanation (i) and includes any payment received or receivable directly or indirectly, by a person acting on behalf of another person for services rendered (not being professional services) or for any services in the course of buying or selling of goods or in relation to any transaction relating to any asset, valuable article or a thing not being securities. Definition of expression ^commission or brokerage' as contained in clause (i) of Explanation to sec.l94H, is not so wide that it would include any payment receivable, directly or indirectly for services in the course of buying or selling of goods. To fall within the said Explanation, the payment received or receivable, directly or1 indirectly, by a person acting on behalf of another person (i) for services rendered ( not being professional) , or (ii) for any services in the course of buying or selling goods (iii) in relation to any transaction relating to any asset, valuable article or thing, the element of agency is to be there in case of all services or transactions contemplated by Explanation (i) to sec.l94H of the Act.

13. Before proceeding further, it is apt to consider decisions relied on by the parties which are as under;

i) In Gordon Woodroffe & Co. v. Sheikh M.A.Majid & Co. (AIR 1967 SC 181) it has been observed that it is well established that even an agent can become a purchaser when an agent pays the price to the principal on his own responsibility and it has been held (head note)

"Contract- difference between sale and agency to sell- what is account stated-when can be reopened-essence of 'sale' is the transfer of title to the goods for price paid or to be paid whereas essence of the agency to sell is the delivery of goods to a person who is to sell them, not as his own property but as the property of the principal who continues to be the owner of the goods and the agent is liable to account for the proceeds - the accounts were settled between the parties and the respondent could not be allowed to reopen the settled account as there was no proof of fraud, mistake or any other sufficient ground - accounts are "settled or stated" if they are submitted and accepted as correct by the other side to whom they have been rendered."

ii) In Idea Cellular Ltd. V. DCIT and vice versa in ITA Nos. 3031/Dei/05 and 1875/Del/06 and ITA No.2867/Del/ 05 dt. 28-3-2008 for assessment years 2003-04, 2004-05 and 2002-03, reported in (2009) 27 SOT (i)I (Breaking News) it has been held vide para 14 of the order as under:

" 14. In order to ascertain whether the PMAs were acting as agents of the assessee or were outright purchasers of goods supplied by the assessee, it is necessary to discuss the distinction between the contract of sale or contract of agency. The essence of contract to sale is the transfer of title to"the goods for price paid or to be paid. The transferee in such case becomes liable to the transferor of goods as a debtor for the price to be paid and not an agent for the proceeds of the sale. On the other hand, the essence of agency to sell is the delivery of goods to a person, who is to sell them, not as his own property but as the property of the principal who continues to be the owner of goods and who is therefore liable to account for the proceeds. The true legal relationship between the assessee and the PMAs has to be inferred from the nature of contract, its terms and conditions and the nature of respective obligations undertaken by the parties. Clause 3 of the agreement specifically provides that the relationship created by the agreement is that of independent contracting parties and is not, and shall not deem to be any relationship inter alia employer/employee principal and agent. Clause 6(b) provides that full legal equitable title and interest in all and any of the prepaid simcard/recharge coupons delivered to PMAs shall remain in ICI and shall not pass to PMA. However, in case the prepaid SIM cards/recharge coupons with PMAs become unusable, substandard or are destroyed due to natural calamities or occurrences or circumstances beyond the reasonable control of either party or due to negligence of PMA in storage, the assessee shall replace the prepa[d simcards/recharge coupons subject to payment of processing fees for such replaced cards. On cursory look on this condition of agreement it appears that ownership on prepaid simcard/recharge coupons remains with he assessee. However, as per the conditions prescribed the PMA shall pay the processing fees for such replaced cards. If the relationship between the assessee and PMA was that of principal and agent, there was no need for recovery of processing fee for replacement of cards, destroyed or become unusable in case of contract of agency the agents acts on behalf of the principle and no question arises for seeking the compensation from the agent in case of loss of property due to natural calamity or occurrence or circumstances beyond the reasonable control of the agent. The agent is required to protect the interest of his principal as a man of ordinary prudence. Another contention of revenue that Clause 8 of the agreement debars the PMA to enter into agreement with other parties for similar telephony services and therefore he is not to act independently. In our view the restrictions prescribed in clause 8 deals with the competitors of he assessee. Such terms and conditions are generally found in commercial agreements. Clause 9 provides for appointment of retailer by PMA. Further clause 10 deals with the price at which PMA shall acquire the prepaid SIM cards/recharge vouchers. The retailers can sell the recharge vouchers to end user at any price not exceeding the maximum retail price. The assessee will receive the fixed amount including service charges. In case of an agent the price collected by him is remitted to the principal after deduction of his commission and expenses relating to sale of the goods. The assessee is not making any reimbursement of the expenditure incurred by the PMA and his retailers. This also suggests that the agreement between the assessee and PMA is that of seller and purchaser. Agreement also provides certain conditions relating to protection of intellectual property rights of the assessee. The other conditions stipulated in the agreement including termination clause do not throw any light so as to suggest that the agreement between the assessee and PMA is that of principal and agent. In the case of Gordon Hoodroffe & Co Madras Ltd. vs. Shaik MA Mazid and Co. AIR 1967 (SC) 181 held that even an agent can become a purchaser when agent pays the price to principal on his own responsibility. In the case before the goods are sold to the PMA who in turn transfer goods to retailer to be sold to the end users. The retailers are appointed by the PMA though with the approval of the assessee but they are working under the instructions of PMAs. Termination of the retailers is co-terminus with the termination of the agreement with PMA. in our considered view the legal relationship between the assessee and PMA is that of seller and purchaser. We do not find any condition in the agreement from which it can be inferred that PMA stands in a fiduciary position in relation to the assessee. It is admitted by the revenue that the agreement in substance is the agreements entered into between the assessee and the PMA is in the nature of contract to sale and not contract of the agency. Therefore, the discount allowed by the assessee to PMA will not fall in the definition of commission of brokerage."

iii) In Foster's India P. Ltd. v. ITO (2008) 117 TTJ (Pune) 346, the Tribunal after relying on the decision in Ahmedabad Stamp Vendors Association v. Union of India (2002) 176 CTR (Guj) 193, Bhopal Sugar Industries Ltd. V. STO AIR 1977 SC 1275 and distinguishing the decisions in ACIT v. Bharti Cellular Ltd. (supra) and Hindustan Coca Cola Beverages (P) Ltd. (supra), has held that distributors incentive, early payment discount and bond expenses do not constitute commission so as to attract TDS u/s 194H as there is no principal-agent relationship between assessee and its distributors.

iv) In Singapore Airlines Ltd. V. ACIT (2005) TIOL-93-ITAT- DEL, it has been held that the amount realized by the travel agent in excess of net fare cannot be considered as commission liable to TDS by Airlines. v) In A.C.I.T., Vs. Bharti Cellular Ltd., [2007] 294 ITR (AT) 283 (Kolkata), it has been held that the agreement between the assessee and its distributors showed that the rights with the prepaid cards at all times vested in the assessee before they were finally sold to the customers. Thus, the assessee was liable to deduct tax at source u/s 194H on the commission payment to its franchisees and the assessing officer was justified in treating the assessee as a defaulter and then computing the deduction of tax at source and interest u/s 201(1) and 201(1A).

vi) In Hindustan Coca Cola Beverages P.Ltd. v. ITO (2005) 98 TTJ 1 (JP), it has been held that when the assessee having sold goods to its distributors to operate in a specified territories only and the sale of goods at fixed margins is under the supervision and control of the assessee, the transaction between the assessee and the distributors on principal and agent basis and not on principal-to- principal basis, and , therefore, the assessee is liable to deduct tax at source u/s 194H in respect of payment to the distributors.

14. Applying the ratio of the above decisions in the light of provisions of sec.l94H, and keeping in view that the decisions relied on by the Id.DR in A.C.I.T., Vs. Bharti Cellular Ltd., [2007] 294 ITR (AT) 283 (Kolkata) and in the case of Hindustan Coca Cola Beverages P.Ltd. v. ITO (2005) 98 TTJ 1 (JP), have been distinguished by the tribunal in Foster's India P.Ltd., supra, on the ground that the normative effect of the judgments of Honourable Supreme Court is far greater than that of the judgments of the coordinate benches, we are of the view that for application of the provisions of sec.l94H of the Act there should be in existence the relationship of principal and agent in order to bring the discount in the ambit of commission or brokerage. Under the definition of expression 'commission or brokerage' as contained in clause (i) of Explanation to sec.l94H, it is not so wide that it would include any payment receivable, directly or indirectly for services in the course of buying or selling of goods, hence discount allowed on transactions resulting in outright purchases cannot be treated as brokerage or commission. In our view, the transactions between the assessee and the distributors are on principal to principal basis and not on principal and agent basis and hence, it cannot be said that the assessee was defaulter attracting the provisions of sec.201 (1) and sec.201(lA) of the Act and accordingly the order passed by the Id. CIT(A) does not call for any interference. The grounds taken by the revenue are therefore rejected.