Case Law Details
Where the impugned amount is not claimed by the assessee by way of deduction under sections 30 to 38 of the Act while computing the income of the assessee under the head “Profits and gains of business or profession” the question of making any dis allowance under section 40(a)(ia) of the Act will not arise.
Full Text of the ITAT Order is as follows:-
This is an appeal filed by the assessee directed against the order of the Commissioner (Appeals)-6, Kolkata, (hereinafter the “Learned CIT(A)”), date 27-12-2016, passed under section 250 of the Income Tax Act, 1961 (hereinafter “the Act”), relating to the assessment year 2013-14.
2. Facts in brief
The assessee is an individual. He is a distributor of Reliance Telecom Limited (RTL) products under the name and style of “Dhruba Communication”. He filed his return of income electronically on 1-10-2013 declaring a total income at Rs. 8,77,090. The assessee declared commission income of Rs. 99,86,594 from RTL against which they deducted tax under section 194H of Rs. 9,98,929. The assessee being a distributor of RTL appointed 496 retailers and through them sold RTL products to the end users. RTL fixed the maximum retail price (MRP) at which the products could sold to the end users. The assessee sold these products to the retailers at a discounted price on the MRP. The assessing officer held as follows :–
(a) As per the copy of the agreement between the distributor (assessee) and the RTL, the assessee has a right to promote/ provide RTL cellular mobile phone service at such rates as fixed by RTL, to the end users and RTL allowed commission against services and deducted tax under section 194H of the Act.
(b) The assessee acted on behalf of RTL as a service provider and service can only be rendered and cannot be sold.
(c) Hence the claim that the assessee allowed discount, does not arise, and it is a case where the assessee allowed the commission to the retailers for providing services.
(d) The assessee is engaged in the business of providing cellular telephone network through a card called “subscriber identity module” (SIM).
(e) Pre-paid and post-paid communication services were provided to the subscribers through distributors appointed by RTL.
(f) The agreement requires the assessee to store the SIM cards and recharge coupons, in such a manner that it would indicate that they were owned by RTL and the assessee was prohibited from deleting the marks etc. from the coupons.
(g) The maximum price of SIM cards and recharge coupons was decided by RTL and he was required to maintain accounts, issue invoices etc. as per the requirements of RTL.
(h) Minimum performing targets were set and hence the assessee was liable to provide services as per the terms and conditions of the company.
3. The assessing officer (AO), treated the discount allowed to the retailers as commission. In the cases of 110 number of retailers, the assessing officer records that the commission/discount paid was exceeding Rs. 5,000. As no tax was deducted at source in terms of section 194H of the Act he held that the amount has to be disallowed under section 40(a)(ia) of the Act. The contentions of the assessee that he is dealing on a principal to principal basis with the retailers was rejected by relying on the decision of the Hon’ble Calcutta High Court in the case of Bharti Cellular Ltd. v. Asst. CIT (2013) 354 ITR 507 (Cal) wherein it was held that section 194H provides for an inclusive definition of the term “commission or brokerage” and the same may be received or receivable indirectly by a person acting on behalf of another person for services rendered.
He further held that there is no question of passing of any ownership or title of the goods from RTL to the distributor and from the distributors to the retailers. RTL had deducted tax from the assessee under section 194H of the Act treating the assessee as an agent and the assessee cannot take a plea that the relationship between the retailer and the assessee was on principal to principal basis. He disallowed an amount of Rs. 71,42,777 under section 40(a)(ia) of the Act. Aggrieved, the assessee carried the matter in appeal before the first appellate authority.
3.1 The first appellate authority relied on the order of the Hon’ble jurisdictional High Court in the case of Bharti Cellular Ltd. v. Asst. CIT (supra) and dismissed the appeal of the assessee.
4. Aggrieved the assessee is before us on the following grounds :–
“ (1) That the orders passed by the learned Revenue authorities to the extent they are prejudicial to the interests of the appellant are arbitrary, erroneous, without proper reasons, invalid and bad in law.
(2) That the learned Revenue authorities erred in having assumed that discount was in the nature of commission whereas the discount was a reduction in sale price for achievement of higher turnover and, therefore, the provisions of section 40(a)(ia) read with section 194H of the Act had no application on the facts of the case and that being so, the dis allowance of Rs. 71,42,777 in the guise of commission is based on misconception of facts of the case and hence not sustainable in law.
(3) That the learned Commissioner (Appeals) erred in not having considered that the assessee never claimed discount by way of expenditure by debit in his profit and loss account, rather the discount given was reduced from the sale price and, therefore, never amounted to payment of commission and that being so the discount given by the assessee cannot be said to be a commission payment within the meaning of section 194H(1) of the Act.
(4) That the learned Commissioner (Appeals) while upholding the dis allowance of Rs. 71,42,777 erred in not having considered that the relationship between the assessee and the several retailers was simply seller and buyers and thus the transactions made by the assessee with the buyers satisfied the definition of sale and hence outside the purview of section 40(a)(ia) read with section 194H of the Act and that being so, the question of making any dis allowance in the guise of commission and the addition of the same to the income of the assessee under section 40(a)(ia) does not arise.
(5) That the decision of the Hon’ble Calcutta High Court relied upon by the learned Revenue authorities has no relevance on the facts and in the circumstances of the assessee’s case inasmuch as in that case the issue was about payment of discount by the principal to its franchisee, whereas in this case the issue is discount paid by the assessee as a seller to its retail customers by way of reduction in sale price and such discount has not been claimed as expenditure in the profit and loss account.
(6) That as the order of the learned Commissioner (Appeals) on the above issues suffers from illegality and is devoid of any merit the same should be quashed and your appellant be given such relief(s) as prayed for.
(7) That the appellant craves leave to amend, alter, modify, substitute, add to, abridge and/or rescind any or all of the above grounds.”
5. The learned counsel for the assessee submitted that the judgment in the case of Bharti Cellular v. Asst. CIT (supra) does not apply to the facts of the case on hand, as it was a case between a company which provides cellular mobile telephone services i.e., Airtel, and its franchisee/distributor. And that whereas, in the case on hand, the assessee is a distributor and has sold SIM cards and other products to various retailers. He took this Bench through the various terms and conditions in the distribution agreement entered into between RTL and the assessee M/s. Dhruba Communications on 14-9-2011 and submitted that the assessee had received commission from RTL after deduction of tax at source and the relationship between RTL and the assessee was that of a principal and an agent. He argues that the relationship between the assessee and the 496 retailers appointed by him was that of a principal to principal basis and the product has been sold to the retailer by the assessee at a rate below the MRP fixed by RTL. He contends that the retailers were not commission agents of the assessee but rather they were purchasers of RTL for reconciling them to the end users. He contends that the retailers act in independent capacities and once the products are sold to the retailers, the propriety of any such product stands transferred to the retailers. He submits that the retailers were free to sell the products to the end users upon verification of their documentation and such sale does not constitute rendering of any service to the assessee and it is not a case of payment of commission. He vehemently contends that there is no relationship of principal and agent but rather that of a buyer and a seller on principal to principal basis. He relied on the decision of the Hon’ble Andhra Pradesh High Court in the case of CIT v. United Breweries Ltd. (2016) 387 ITR 150 (T&AP).
5.1. He referred to the definition of the term ‘‘commission” in the Black’s Law Dictionary, and relied on the judgment of the Hon’ble Bombay High Court in the case of Harihar Cotton Pressing Factory v. CIT (1960) 39 ITR 594 (Bom) and the judgment of the Hon’ble Delhi High Court in the case of CIT v. Mother Dairy India Ltd. (2013) 358 ITR 218 (Delhi) for the propositions that the discount given on sale of products to the retailers by the assessee cannot be termed as “commission” with the ken of section 194H of the Act. He vehemently contended that the assessee did not pay any commission on pre- paid SIMs, recharge coupons, etc. and on the other hand, it was the retailers, who paid amounts to the company on the invoices raised by it. He pointed out that in the books of account and sale registers, the sales were recorded at the rate which the products were sold to the retailers and there was no entry claiming expenditure of commission paid to the agents.
5.2. He submitted that as the assessee never claimed any expenditure under sections 30 to 38 of the Act or in the profit and loss account or while computing income under the head “Profits and gains from business” and hence, the dis allowance cannot be made under the provisions of section 40(a)(ia) of the Act. He took this Bench through the wording of section 40(a)(ia) and submitted that the cumulative conditions are to be satisfied before the expenditure claimed is disallowed under section 40(a)(ia) of the Act. He submitted that when the method of accounting and the methodology followed by the assessee does not result in any claim of expenditure, there is no question of a disallowance being made of that which is not claimed. He referred to the definition of “commission or brokerage” under section 194H clause (i) of the Explanation and submitted that commission/ brokerage includes payments received or receivable by a person acting on behalf of another person for services of certain nature rendered by the former to the later. He submitted that a combined and synchronised reading of section 40(a)(ia) and section 194H of the Act reflects that the buyer should be the principal who has paid income in the nature of commission on sale of products to the agents. Disallowance under section 40(a)(ia) read with section 194H of the Act as per the learned counsel for the assessee, will be applicable only if there is principal agent relationship and only if the impugned payments was commission offered to the retailers by the assessee. He relied on the decision rendered in the case of National Panasonic India (P) Ltd. v. Deputy CIT (2005) 3 SOT 16 (Delhi), for this propositions and submitted that these ingredients are absent in the case on hand. He distinguished the decision, in the case of Bharti Cellular Ltd. (supra). He-further relied on the second proviso to section 40(a)(ia) and submitted that as retailers have accounted for the discount paid regarding the actual purchase price in their books, the assessee cannot be deemed to be an assessee in default and consequently no dis allowance can be made under section 40(a)(ia) of the Act. He relied on the following case law for the proposition that the amendment by way of introduction of the second proviso to section 40(a)(ia) of the Act is retrospective :–
(a) Rajeev Kumar Agarwal v. Asst. CIT (2014) 149 ITD 363 (Agra)
(b) CIT v. Ansal Land Mark Tozvnship (P) Ltd (2015) 377 ITR 635 (Delhi).
6. The learned Departmental Representative on the other hand, relied on the order of the assessing officer as well as the learned Commissioner (Appeals) and submitted that the issue is squarely covered in favour of the Revenue by the decision of the jurisdictional High Court in the case of Bharti Cellular Ltd. (supra). He took this Bench through the agreement between the assessee and RTL and the facts of the case of Bharti Cellular Ltd. (supra) and submitted that this were identical. He pointed out that the Hon’ble High Court held that the true intention of the parties has to be gathered on a careful reading of the entire agreements. He submitted that the Hon’ble High Court has distinguished this case from the facts of the case before the Hon’ble Gujarat High Court in the case of Ahniedabad Stamp Vendors Association v. Union of India (2002) 257 ITR 202 (Guj). He disputed the claim of the assessee that the dealing between the assessee and the retailer is on a principal to principal basis and submitted that it is a case of rendering of services. He prayed that the order of the first appellate authority be upheld and the appeal of the assessee be dismissed.
7. We have heard the rival contentions. On a careful consideration of the facts and circumstances of the case, a perusal of the papers on record as well as of the order of the authorities below, we hold as follows :–
7.1. The jurisdictional High Court in the case Bharti Cellular Ltd. (2013) 354 ITR 507 (Cal), in its judgment dated 19-5-2011 at paragraph 25 observed as follows (page 516 of 354 ITR) :–
“It appears from the records in this case that the transaction in the case of prepaid SIM cards, and rechargeable coupons, sufficient stocks are to be kept by the franchisee, and then the same are to be sold to the retailers at a rate stipulated by the assessee, say at Rs. 324 and the retailer is allowed to sell it to the ultimate customer at the maximum price again fixed by the assessee, say at Rs. 330. The assessee is to realize lesser rate say at Rs. 317 per SIM card from franchisee.–Thus discount of Rs. 7 is given. Therefore after selling all the SIM cards and pre- paid coupons to the retailers the franchisee is to make payment of sale proceeds to the assessee after deducting a discount of Rs. 7 per SIM card. Thus this receipt of discount at Rs. 7 is in real sense commission paid to the franchisees. Hence all the trappings of liability as agent, of the franchisee towards the assessee subsists.”
8. A perusal of the above demonstrates that the SIM cards and rechargeable cards are sold to the retailers by the franchisee at the rate stipulated by the main seller company and only such discounted amount is collected by the distributor from the retailer. Thus, the retailer purchased the SIM cards from the franchisee. These observations of the Hon’ble High Court negated the conclusions of the assessing officer as well as the learned Commissioner (Appeals), that it is a case of rendering of services by the retailer to the franchisee store/distributor. The difference in the facts are that the distributor deducts his discount and remits the balance to the cellular operator and whereas the retailer pays the discounted rate to the distributor. The retailer sells the goods to the customers at the maximum retail price.
8.1. The jurisdictional High Court was dealing with a case between the seller company and the franchisee/ distributor. It was not dealing with the case of a distributor and a retailer. It is clear that the facts of the case are different and hence this judgment is not applicable to the facts of this case.
Be it as it may, the undisputed fact is that the assessee i.e. the distributor M/s. Dhruba Communication, records the sales to the retailers at a discounted rate which is below the MRP. This is the rate at which the sale is made. There is no payment of the differences between discounted rate and the MRP by the retailer to the distributor or vice versa. This quantum of discount from the MRP has never been claimed as expenditure by the assessee in its books of account. Under these circumstances, we are of the considered opinion that no dis allowance can be made under section 40(a)(ia). When nothing is claimed as a deduction under sections 30 to 38 of the Act or in the computation of income no dis allowance can be made under section 40(a)(ia) of the Act.
8.2. Section 40(a)(ia) of the Act. reads as follows :–
“40. Amounts not deductible.–Notwithstanding anything to the contrary in sections 30 to 38, the following amounts shall not be deducted in computing the income chargeable under the head ‘Profits and gains of business or profession’–
(a) in the case of any assesses–. . .
(ia) any interest, commission or brokerage, rent, royalty, fees for professional services or fees for technical services payable to a resident, or amounts payable to a contractor or sub-contractor, being resident, for carrying out any work (including supply of labour for carrying out any work, on which tax is deductible at source under Chapter XII-B and such tax has not been deducted or, after deduction has not been paid on or before the due date specified in sub-section (1) of section 139 :–
Provided that where in respect of any such sum, tax has been deducted in any subsequent year, or has been deducted during the previous year but paid after the due date specified in sub-section (1) of section 139, such sum shall be allowed as a deduction in computing the income of the previous year in which such tax has been paid :–
Provided further that where an assessee fails to deduct the whole or any part of the tax in accordance with the provisions of Chapter XVII-B on any such sum but is not deemed to be an assessee in default under the first proviso to sub-section (1) of section 201, then, for the purpose of this sub-clause, it shall be deemed that the assessee has deducted and paid the tax on such sum on the date of furnishing of return of income by the resident payee referred to in the said proviso.
Explanation–For the purposes of this sub-clause,–
(i) ‘commission or brokerage’ shall have the same meaning as in clause (i) of the Explanation to section 194H;
(ii) ‘fees for technical services’ shall have the same meaning as in Explanation 2 to clause (vii) of sub-section (1) of section 9.
(iii) ‘professional services’”
8.3. Therefore, for invoking the provisions of section 40(a)(ia) of the Act, the following cumulative conditions, are required to be satisfied :–
(i) The impugned amount should be of the nature of interest, commission or brokerage, rent, royally, fees for professional services or fees for technical services or amounts payable to contractor or sub-contractor for carrying out any work as defined in the Explanation to the said section.
(ii) The assessee should be held liable under Chapter XVII-B of the Act for deduction of tax at source on such amounts/ payments.
(iii) The assessee should have failed to deduct tax at source on such payments or after deduction should have failed to pay it on or before the due date specified under section 139(1).
If all the aforesaid cumulative conditions are satisfied, then the said expenditure will be caught within the mischief of section 40(a)(ia) of the Act and will not be allowed as deduction under section 30 to 38 while computing income chargeable under the head “Profits and gains of business or profession”. In other words, if an amount satisfying all the aforesaid conditions is claimed by the assessee by way of deduction under sections 30 to 38 of the Act while computing income under the head “Profits and gains of business or profession” (i.e., by debiting the same in the profit and loss account), the same shall be disallowed or added back while computing the income of the assessee under the said head in terms of section 40(a)(ia) of the Act. As a natural corollary, where the impugned amount is not claimed by the assessee by way of deduction under sections 30 to 38 of the Act while computing the income of the assessee under the head “Profits and gains of business or profession” the question of making any dis allowance under section 40(a)(ia) of the Act will not arise irrespective of the fulfillment/non-fulfillment of the other conditions satisfied in points (i) to (iii) supra.
8.4. The assessee’s case does not fall within any of the conditions specified under points (i) to (iii) supra. In the instant case, the impugned amount of discount of Rs. 71,42,777 over the gross value of RTL products sold/supplied by the assessee to the 110 retailers has not been claimed as deduction by the assessee under sections 30 to 38 of the Act Hence, the question of making any dis allowance or adding back of the said discount to the income of the assessee under section 40(a)(ia) of the Act does not arise.
9. Thus on this ground, we have to necessarily delete the dis allowance made under section 40(a)(ia) of the Act of an expenditure which was never claimed by the assessee. As we have accepted this contention of the assessee and allowed the claim, we do not deal with the other contentions raised by the assessee, as it would be and academic exercise.
10. In the result, the dis allowance made is hereby deleted and the appeal of the assessee is allowed.
