Bajaj Auto Limited Vs DCIT (ITAT Mumbai)
The Income Tax Appellate Tribunal (ITAT), Mumbai, considered the assessee’s appeal against the order of the Commissioner of Income Tax (Appeals)/National Faceless Appeal Centre (NFAC) for Assessment Year 2021-22 concerning disallowance under Section 40(a)(ia) of the Income Tax Act, 1961 for alleged failure to deduct tax at source under Section 194H.
The assessee, engaged in the manufacture of automobiles, commercial vehicles and distribution of automobile spare parts, had claimed expenditure relating to target discounts, consistency discounts and cash discounts granted to spare parts dealers. During assessment, the Assessing Officer noted that discounts aggregating ₹183.93 crore had been provided to dealers, comprising target discounts of ₹90.72 crore, consistency discounts of ₹72.72 crore and cash discounts of ₹20.47 crore. Treating these discounts as commission, the Assessing Officer invoked Section 194H and disallowed 30% of the expenditure, amounting to ₹55.18 crore, under Section 40(a)(ia).
The assessee explained that the discounts were granted under predetermined schemes communicated to dealers in advance. Target and consistency discounts were linked to achievement of purchase targets and computed as a percentage of sales turnover, while cash discounts were granted for maintaining specified credit balances or making early payments. The assessee maintained that these were trade discounts extended to dealers purchasing spare parts in bulk. It further contended that transactions with dealers were on a principal-to-principal basis, dealers purchased goods independently, unsold goods were not returnable, losses on unsold inventory were borne by the dealers, and the assessee had no involvement in subsequent sales made by the dealers to customers. Accordingly, it asserted that Section 194H was inapplicable as the discounts did not constitute commission. The assessee also relied on dealership agreements and judicial precedents in support of its case.
The Assessing Officer rejected the explanation, holding that the discounts were computed on achievement of periodic sales targets and therefore represented compensation akin to commission. According to the Assessing Officer, the discounts were granted through credit notes after sales and constituted commission paid under the guise of sales discounts. The Commissioner (Appeals) affirmed this view, holding that the discounts were linked to sales performance and should be treated as commission liable for tax deduction under Section 194H, thereby sustaining the disallowance under Section 40(a)(ia).
Before the Tribunal, the assessee reiterated that the dealership arrangements had existed for several decades and that similar discounts had been consistently allowed in earlier years. It relied upon the dealership agreements to demonstrate that the relationship with dealers was that of principal and principal. The assessee emphasised that dealers independently purchased goods, bore commercial risks relating to unsold inventory, made advance payments, and were not acting as agents. It also relied upon judicial precedents holding that incentives and discounts granted in principal-to-principal transactions were not commission under Section 194H.
The Revenue argued that the benefits granted under the sales discount schemes were incentives for marketing and sales promotion which accrued only to dealers and not to end customers. It submitted that these incentives were in the nature of commission for services rendered by dealers and relied upon the Tribunal’s decision in SKOL Breweries Ltd. Vs ACIT.
After considering the rival submissions, the Tribunal observed that neither the Assessing Officer nor the Commissioner (Appeals) had recorded any adverse finding regarding the terms of the dealership agreements or the principal-to-principal relationship between the assessee and its dealers. The Tribunal held that the fundamental requirement for deduction of tax at source under Section 194H was the existence of a payment to a person acting on behalf of another. In the present case, the assessee had sold spare parts to dealers under agreed commercial terms, and the dealers made payments for the goods supplied.
The Tribunal referred to the definition of “commission or brokerage” in the Explanation to Section 194H and observed that an element of agency was necessary for the provision to apply. It found no material to establish that the dealers acted as agents of the assessee or that the discounts represented commission. The Tribunal also noted that no investigation had been conducted regarding the treatment of these discounts by the dealers, no survey action had been carried out by the TDS authorities, and there was no evidence that the discounts were commission payments rather than trade discounts.
Distinguishing the decision in SKOL Breweries Ltd. Vs ACIT, the Tribunal observed that in that case the assessee had failed to produce the relevant discount schemes and the matter had been remanded for verification. It held that the observations made therein could not prevail where binding jurisdictional High Court decisions supported the assessee’s case.
Accordingly, the Tribunal held that the discounts could not be treated as commission for the purposes of Section 194H and that there was no justification for the disallowance under Section 40(a)(ia). The assessee’s appeal was allowed.
Cases Discussed
- Bharti Cellular Ltd Vs ACIT (Supreme Court), (2024) 160 taxmann.com 12 (SC)
- CIT Vs Intervet India (P) Ltd. (Bombay High Court), [2014] 49 taxmann.com 14 (Bombay)
- Mahindra & Mahindra Ltd. Vs. DCIT (ITAT Mumbai), ITA No. 586/Mum/2013
- Mahindra & Mahindra Ltd. Vs. DCIT (ITAT Mumbai), ITA No. 799/Mum/2011
- SKOL Breweries Ltd. Vs ACIT (ITAT Mumbai), (2013) 29 taxmann.com 111 (Mumbai)
- CIT Vs Ahmadabad Stamp Vendors Association (Supreme Court), [2012] 348 ITR 378 (SC)
- CIT Vs Jai Drinks (P) Ltd. (Delhi High Court), (2011) 336 ITR 383 (Delhi)
FULL TEXT OF THE ORDER OF ITAT MUMBAI
1. This Appeal by Assessee is directed against order of learned CIT(A)/National Faceless Appeal Centre (NFAC), Delhi dated 13/03/2025 for assessment year 2021-22. The assessee has raised following grounds of appeal:
“Disallowance under section 40(a)(ia) in respect of target discount, consistency discount and cash discount provided to spare parts dealers: Rs. 55,18,08,851:
1. On the facts and in the circumstances of the case and in law, the Commissioner of Income-tax (Appeals) erred in upholding the action of the Assessing Officer in disallowing a sum of Rs. 55,18,08,851 under section 40(a)(ia), for non-deduction of tax at source under section 194H, computed at 30% of the following discounts provided to spare parts dealers:
a. Target discount of Rs. 90,72,94,817;
b. Consistency discount of Rs. 72,72,96,107; and
c. Cash discount of Rs. 20,47,71,915.
In doing so, the Commissioner of Income-tax (Appeals) erred in the following respects:
2. in incorrectly observing that the Appellant has paid commission to its dealers under the cover of sales discounts.
3. in observing the Appellant is offering discounts on completion of periodic targets which is computed as a percentage of sales turnover and therefore akin to commission.
4. in upholding the stand taken by the Assessing Officer that since the discount is not a part of the invoice and is provided by way of credit note, it should be treated as commission
5. in not appreciating the fact that in the case of the Appellant, the discount paid to dealers ought not to be regarded as commission, since the dealers neither act on behalf of the Appellant, nor do they provide any service to the Appellant in the course of sale of goods by the Appellant,
6. in not appreciating the fact that the transaction of the Appellant with its dealers is on a principal-to-principal basis and not on principal-agent basis, which is evident from the following:
a) Sample agreement between the Appellant and the dealer, which clarifies that the relationship between the Appellant and the dealer is that of principal to principal;
b) Once the Appellant sells the spare parts to the dealers, the sale of the Appellant is concluded
c) the dealer is not entitled to return the spare parts purchased from the Appellant, in case they remain unsold, and hence the risk of obsolete/ unsold stock lies with the dealer;
d) Neither is the Appellant privy to the sale of spare parts by a dealer to the customers, nor is the customer privy to the sale of spare parts by the Appellant to a dealer;
e) the sale by the Appellant to the dealer as well as the sale by the dealer to the customer is subject to goods and services tax.
The above grounds of objections are distinct and separate and without prejudice to each other.”
2. Brief facts of the case are that, assessee is a company engaged in the business of manufacturing automobiles and commercial vehicle and distribution of auto parts. The assessee filed its return of income for AY 2021-22 on 31/03/2022 declaring income of Rs. 52.68 crores. The case was selected for scrutiny. During assessment, the Assessing Officer (AO) noted that assessee has shown expenditure aggregate to Rs.183.93 crores in respect, of commission and discount paid to spare parts dealers which consists of target discount spare parts of Rs.90,72,94,817/-, consistency discount spare parts of Rs.72,72,96,107/- and cash discount to dealers spare parts of Rs.20,47,71,915/. The AO issued show cause notice dated 11/11/2022 to justify such discount with documentary evidence and as to why disallowance on sales discount in the form of commission should not be made this year. The AO took his view on the basis of similar disallowance made in earlier assessment year. The assessee filed its reply dated 09/12/2022 and submitted that no TDS was required to be made as the amount was on account of sale discount and not commission. The contents of detailed reply of assessee are recorded on page no.11 to 13 of the assessment order. In the reply, the assessee stated that such discounts were provided to the spare part dealers as per the scheme of assessee. Target discount and consistency discount are offered on completion of periodic target and computed as per percentage of sales turnover. Such discount policy was decided and communicated to all dealers well in advance and the said discount is more in the nature of trade discount offered to those dealers who purchase in bulk quantities from assessee during particular period. Cash discount is given for maintaining a specified credit balance with assessee. Such discount is not linked to the sales made by dealers, but based on purchase of bulk quantities by the dealers from assessee. The transaction of assessee with dealers is on principal-to-principal based. The dealers purchase spare part from assessee independently and not as agent. In case any spare parts, if remains unsold by the dealers, is not returnable to assessee and loss, if any has to be borne by the dealers himself. Further, discount is provided only to those dealers who achieve the targets as set by assessee and not for all dealers. Further, neither the assessee privy to the sale of spare parts by a dealer to the customers, nor is the customers privy to sale of his spare parts by assessee to dealer. Such transaction by assessee and dealer is pure in the nature of sale transaction and provision of section 194H is not applicable. The assessee also relied on the decision of Bombay High Court in CIT Vs Intervet India (P) ltd. [2014]49 taxmann.coml4 (Bombay), decision of Supreme Court in CIT(A) Vs Ahmadabad Stamp Vendors Association [2012] 348 ITR 378(SC) and Mumbai Tribunal in Asus India Pvt ltd. Vs ACIT in ITA 7831/Mum/2019. The reply of assessee was not accepted by AO. The AO was of the view that discount is given from the gross price and it occurs at the instance of sale and purchase between manufacturer and the distributor/ dealer. Whereas, commission is in the nature of refund and compensation performing some task or business by on behalf of other and in case of sale purchase of goods, the commission accrued at the instance of further sales by the dealers or distributors. The assessee is offering such discount on completion of periodic target and is computed as a percentage of sale turn over. Hence, it is established that assessee has paid commission to its dealers under the garb of sale discount. The AO concluded that the amount of Rs.183.93 crores debited and/or charged to its profit and loss account on account of various sales discount scheme is nothing, but in the nature of commission only. The AO also referred and relied on the decision of Delhi High Court in CIT (A) Vs Jai Drink Pvt Ltd in Tax Appeal No.399 of 2010. On the basis of aforesaid view, the AO held that assessee has paid commission to its dealer under the garb of sale discount and disallowed under section 40(a)(ia) and thereby, made the disallowed Rs.55.18 crores i.e. 30% of Rs.183.93 crores under section 40(ia).
3. Aggrieved, by the additions in the assessment order, the assessee file appeal before Ld. CIT(A). Before Ld.CIT(A) the assessee filed detailed return submission. The submissions of assessee are recorded as page no.7 to 10 of impugned order. The assessee in its submission reiterated his stand taken before AO. The assessee also furnished sample copy of agreements which such dealers about allowing impugned discount as well as dealership agreement with certain dealers. The assessee also explained that relationship of assessee with dealers is strictly on principal to principal basis. During the term/ period of agreement, functions of the dealers is to distribute and the sale of products only within the territory and will not do anything that may prevent/affect such distribution/sale or interfere with the development of assessee’s trade of assessee exclusive dealership or in the business of other dealers of assessee for the product, if any in the said territory. Dealers are required to pay to all cost incurred by assessee inclusive of packing, insurance, freight, etc. the dealer is required to make 100% advance payment for the orders place with the assessee. In case of delay in making payment, the dealers are liable to pay interest. This shows that dealer independently places their order with assessee and has to make payments irrespective of whether, the product is sold or not. Such arrangements are not found in case of involving the agent. The assessee also explained various other clauses of their agreement with dealers.
4. The Ld. CIT(A) after considering the submission of assessee confirm the action of AO by holding that discount scheme are directly passed through credit notes. The assessee offering discounts on completion of periodic target and this is computed as per percentage of sales turn over. Discount is given from gross price and occurs at the instance of sale and purchase transaction between the manufacturer and distributor. Commission on the other hand is in the nature of compensation for performing some business, as in case of sale and purchase of goods commission is occurred at the instance of further sales by distributors. The assessee is offering discount on completion of periodic target and his computed as percentage as sales turn over. Thus, it is clear that assessee has paid commission to its dealers under the cover of sales discount and it should be disallowed by apply provision section 40(a)(ia). Further, aggrieved the assessee has filed present appeal before Tribunal.
5. We have heard the submission of learned authorised representative (Id. AR) of the assessee and the Id Commissioner of Income-tax/ Departmental representative (CIT-DR) for the revenue. The Id. AR of the assessee made her submission on the lines of reply and submission filed before Id. CIT(A). The Ld. AR of the assessee submits that assessee is well known auto mobile manufacturer and manufacturer of automobiles spare parts. The assessee has appointed dealers for sales of spare parts across the nation. The assessee as per its policy and agreement with dealers allowed certain discount which consists of target discount on the spare parts, consistency discount and cash discount to dealers. Such discount is being allowed from several decades. No such discount was ever questioned by revenue authorities. Disallowance was started from AY 2016-17, 2017-18, 2018-19, 2019-20 &2020-21 and in the year under consideration. Appeal against such treatment in AY 2019-20 & 2020-21 is still pending before Ld. CIT(A). However, this appeal has decided first by Ld. CIT(A) thus, present appeal by assessee has come up before Tribunal. The Ld. AR by referring her submission as recorded by Ld.CIT(A) on page 7 to 8 of the impugned order submit that such discounts were provided to the spare parts dealers as per scheme of the assessee company. Target discount and consistency discount are offered on completion of periodic target and computed on percentage of sales turn over. It is policy of the assessee which was communicated to the dealer in advance, which is in the nature of trade discount offered to those dealers who purchase in bulk. Copy of such tax invoices were furnished to the lower authorities. Further cash discount is provided to the dealer on early payment against the spare parts. Such discount is made on principal to principal basis. Once the spare parts/ goods are supplied to the dealers, it is at the disposal of those dealers and if any spare part remains unsold the same are not returnable the assessee and any if any loss, it is to be borne by the dealer himself. Discount is provided only those dealers who achieve the target set by assessee. The department has never questioned such arrangement. The provision of Section 194H is not at all applicable on such discount. Distributors are not in fact agent of assessee. The distributors purchases goods on their account and sales in their territory. The profit made is the margin of difference between the purchase price and the sale price. The distributor is an independent person. The Id. AR of the assessee submit that grounds of appeal raised in the present appeal is in fact covered in favour of assessee by the decision of Jurisdictional High Court in CIT(A) Vs Intervet India (P) ltd (supra) wherein, it was held that the assessee offered incentive to distributors/stockiest sale target on principal-to principal basis, that incentive could not be treated as commission. The case of assessee is exactly similar. Similarly, in case of CIT(A) Vs Ahmadabad Stamp Vendors Association 348 ITR 378 (SC), it was held that no TDS is required on discount given to stamp vendors on purchasing stamps in bulk quantity. Similar view was taken by Delhi High Court in CIT Vs Jai Drink(P)Ltd.(supra). Further, similar view was taken by Bombay Tribunal in Mahindra & Mahindra Pvt Ltd. Vs DCIT in ITA 799/Mum/2011, which was followed in subsequent decision in Mahindra & Mahindra in AY 2008-09 in ITA no. 586/Mum/2013, which has been upheld by Hon’ble Jurisdictional High Court and further Special Leave Petition (SLP) filed before Hon’ble Supreme Court has been dismissed in SLP No. 1468 of 2018 dated 12/11/2018. The Ld. AR of the assessee also relied upon the decision of Hon’ble Supreme Court in Bharti Cellular Ltd Vs ACIT (2024) 160 taxmann.com 12(SC). The Id. AR of the assessee finally submits that she would file details of similar discount debited in its computation of income which was consistently allowed by AO.
6. On the other hand, Ld. CIT-DR for the revenue supported to order of lower authorities. The Id CIT-DR for the revenue submits that the assessee has given benefits under various sales discount scheme for marketing and sales promotion of the products by the distributors which does not pass on to the retailers or end user of the product. The benefit given by the assessee does not percolate to the retailer or to the end user and limit to the dealer, cannot be said to be in the nature of discount. The difference between the maximum retail price (MRP) and the price as invoiced to the dealers but relates to incentives given by assessee in addition to the merger on the purchase and sale of goods. Even if the relationship between the assessee and dealers is that of principle to principle, so far as the price and sale product is concerned, the incentive allowed by assessee to the dealers is not accruing from transaction of sale and purchase, therefore, cannot be regarded as income by way of purchase and sale of product. When incentive benefit is given or compensation is given for undertaking any job or task, services provided or on sale of goods by 1.00 % on behalf of others then it is called commission. The case of assessee clearly falls under commission, which attracts application of section 194H. To support his submission, the Id. CIT/DR for the Revenue relied on the decision of Mumbai Tribunal in SKOL Breweries Ltd. Vs ACIT (2013) 29 taxmann.com 111 (Mumbai). The Id CIT-DR for the revenue while referring para-12 of decision would submits that the assessee recognized its revenue from sale on which the goods were sold to the distributor and the amount of so called discount is separately treated as expenditure on account of sale scheme expenses and under specific head ‘sale price discount’ and accordingly, debited to the profit and loss account. Such treatment clearly brings out the case of the assessee from the ambit of discount. For sales tax purpose also the assessee has shown sale price without reducing such so called discount. The benefit given under the sale scheme expense may be for marketing and sales promotion of the products by the distributor which does not pass on to the retailer or the end user of the products. Thus, the benefit given by the assessee does not percolate to the retailer or to the end user and limit to the distributor cannot be said in the nature or character of ‘discount’.
7. We have considered the submission of both the parties and have gone through the orders of lower authorities carefully. We have also deliberated on various case laws relied by assessee. We find that while passing assessment order, the assessing officer treated various discount allowed by assessee to its dealer as commission by holding that discount is given from the gross price and it occurs at the instance of sale and purchase between manufacturer and the distributor/ dealer. The AO was also of the view that commission is in the nature of refund and compensation performing some task or business by on behalf of other and in case of sale purchase of goods. The commission accrued at the instance of further sales by the dealers or distributors. The assessee is offering such discount on completion of periodic target and is computed as a percentage of sale turn over. The AO was of the view that assessee has paid commission to its dealers under the garb of sale discount. The amount of Rs.183.93 crores debited and/or charged to its profit and loss account on account of various sales discount was treated as commission and was disallowed under section 40(a)(ia) for the want of TDS under section 194H. The AO the disallowed Rs.55.18 crores i.e. 30% of Rs.183.93 crores under section 40(ia). We find that the Id. CIT(A) confirmed the action of assessing officer by holding that the assessee is offering discount on completion of periodic target and his computed as percentage as sales turn over. Thus, it is clear that assessee has paid commission to its dealers under the cover of sales discount and it should be disallowed by apply provision section 40(a)(ia). We find that the assessee right from the beginning has claimed the relationship of assessee with its dealers were based on agreement that is of principal to principal (P2P) basis and not that of agent. The AO as well as Id CIT(A) has not given any adverse remark on the various clauses of the agreement of assessee with its dealers.
8. In our view, the fundamental principle and requirement for making TDS arise when the person is responsible for making some payment. However, in the cash in hand, the assessee in fact is not responsible for making payment to his various dealers, rather sold the spare parts on certain terms and conditions. Such terms and conditions are agreed to regulate the price. In fact, the dealers are making payment against the spare parts supplied to them by the assessee under the terms and conditions of dealership.
9. We find that Hon’ble Apex Court in CIT Vs Ahmadabad Stamp Vendors Association (2012) 348 ITR 378 (SC) while confirming the finding of Gujarat High Court held that discount given to Stamp Vendors for purchasing stamp in bulk quantity was in the nature of cash discount in transaction of sale, an therefore, section 194H has no application to that transaction. The Gujarat High Court held in said case reported viz, [2002] 124 Taxman 628 held the licensed vendor has to pay less the discounted at the rate provided in the Gujarat Stamp duty and Sales Rules. The liability of the Stamp Vendor to pay the price less the discount is not dependent upon or contingent to the sale of the stamp paper by the Licensed Vendor. The licensed vendor would not be entitled to get any compensation or refund of the price if the stamp papers were to be lost or destroyed. The Gujarat Stamps Supply and Sales Rules themselves contemplate that what the licensed vendor does, while taking delivery of the stamp papers from the Government offices, is purchasing the stamp papers.
10. The Hon’ble Delhi High Court in CIT Vs Jai Drinks (P) Ltd. (2011) 336 ITR 383 (Delhi), while considering the similar issue (question of law) that when agreement between the assessee and distributor was clearly stipulated to be an agreement on principle to principle basis, payments made by assessee to distributor were as incentive and discounts and not commission liable for deduction at source under section 194H. We further find that while following the decision of Delhi High Court in CIT Vs. Jai Drinks (P) Ltd., the co-ordinate bench of Mumbai Tribunal in Mahindra & Mahindra Ltd. Vs. DCIT (supra) also held that when transaction between the assessee were on principal to principal basis that is on certain term and condition in the form of agreement with clearly indicates the fact that transactions were affected through agreed condition by the dealer and it did not act as agent of assessee company. What was charged by the dealer is the price and the transactions are not of the nature that there is supply of goods by the assessee to the dealer on the basis of any commission or otherwise for any other similar condition. The transaction between the assessee and dealer must be regarded as transaction between principal and principal and not as between principal and agent. Both the parties to the agreement are paying sale tax. Dealer is taxed on the profit so made by it on its business. Such decision of Tribunal affirmed by the Honble Bombay High Court in Tax Appeal No. 1148 of 2014 dated 06.02.2017 and further Special Leave Petition filed before Honible Apex Court was dismissed vide order dated 12.01.2018. We further find that Hon’ble Jurisdictional High Court in CIT Vs. Internet India (P) Ltd. (2014) 49 taxmann.com 14 (Bombay)also held that where assessee offered incentive to distributor / stockiest on meeting of sales target on principal to principal basis, the incentive could not be termed as commission payment under section 194H of the Act.
11. In view of above legal discussions and adverting to the facts of the present appeal, we find that the assessee has furnished copy of agreement with its distributors and the details of payments of various discounts to dealers. No investigation of facts from such dealers about treatment of such discount is carried out, if they have shown such payment as commission income or their business income. No adverse remark on various terms and conditions of distributor agreement is made by assessing officer. The assessee is a well-known auto mobile manufacturer in India and claimed that they are consistently following similar practice from various decades and such discount payment/concession was started doubting by revenue authorities from last certain years only. No survey action was carried out by TDS authorities. There is no evidence or material on record to suggest that discount allowed by assessee is against the commission payment or that the dealers were not doing their business independently or merely acting an agent of assessee. On careful perusal of the definition of ‘commission or brokerage’ as given in Explanation to section 194H, we find that to bring any payment within the Explanation, the payment received or receivable, directly or indirectly, is 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, and / or in relation to any transaction relating to any asset, valuable article or thing. So there must be an element of agency is to be there in case of all services or transactions contemplated by Explanation (I) to section 194H. Thus, we do not find any justification for treating the discount as a commission payment for attracting provision of section 40(a)(ia).
12. So far as reliance on case laws by Id. CIT/DR in SKOL Breweries Ltd. Vs ACIT (supra) is concerned, the facts of this case are at variance. In the said case, the coordinate bench of tribunal held that the assessee failed to produce any material like scheme under which the benefits were allowed to the distributors. In absence of any scheme under which such benefits were allowed it was held that it is not possible to give conclusive findings on the issue and the matter was restored back to the AO to verify and examine the relevant record and to decide issue as per law. Thus, certain observation made by bench is mere obiter and cannot be followed, when there are clear decisions of jurisdictional High Court and other non-jurisdictional High Court. In the result, the grounds of appeal raised by the assessee are allowed.
13. In the result, the appeal of the assessee is allowed.
Order pronounced on 13/06/2025 in open court.
