When there is direct sale transaction between two principals and there is no principal agent relationship, provisions of section 194H are not applicable
Section 194H of the Income Tax Act, 1961(for short ‘the Act’) deals with the deduction of tax at source on commission or brokerage.
Before Mumbai ITAT, recently in, DCIT vs. Cox & Kings (I) Ltd. & vice-versa [ITA No.5583/Mum/2015 and ITA No.5440/Mum/2015, decided on 06.10.2017], brief facts were that the assessee was in the business of tours and travels and in the course of such business it also engaged itself in trading in foreign currency. During the assessment proceedings the AO called for the details of transactions in the business of trading in foreign exchange. In response, the assessee furnished foreign exchange trading account wherein an amount of 51,13,680/- was debited towards commission payment. The AO called upon the assessee to furnish details of tax deducted at source on such payments. From the details submitted by the assessee he found that the assessee had not deducted tax at source on an amount of 19,09,775/-. When called upon to explain the reason for non deduction of tax at source on such amount, it was submitted by the assessee that the payment was not in the nature of commission but premium paid separately to RMCs (Restricted Money Changers) at Goa for purchase of foreign currency by the assessee from them and which they, in turn have purchased from foreign tourists. It was submitted, RMCs requested for reimbursement at card rate, i.e. the rate at which they paid to the tourists in order to keep track of profits earned by them on stock sold to the assessee. The AO was not convinced with the explanation of the assessee. He opined, though, the assessee has claimed to have entered into such transactions with RMCs on principal to principal basis however the facts indicate a principal and agent relationship as the so called premium is debited under the head commission which is over and above the purchase price. Since, the assessee had not deducted tax at source on such payment, the AO disallowed the amount of 19,09,775/- under section 40(a)(ia) of the Act. The assessee challenged the disallowance before the CIT(A).
Before CIT(A), the assessee reiterated the stand taken before the AO. The learned CIT(A) after considering the submissions of the assessee sustained the addition by holding that payment made by the assessee is covered under Section 194H. While holding so, he also observed that the assessee has itself originally booked such expenditure as commission.
The learned A.R. submitted that the assessee had been authorised by the Reserve Bank of India (RBI) to deal in foreign currency. He submitted, the RBI also appoints/authorises certain persons/entities as RMC who were authorised to purchase foreign currency from non-residents visiting different places in India including Goa. These RMCs operate from their shops/hotels to encash foreign currency and travellers cheques from foreign tourists. He submitted, the assessee has foreign exchange division approved by the RBI to buy foreign exchange currency and travellers cheque from RMCs. It was submitted that the RMCs are wholesale customers of the assessee’s foreign exchange division and assessee pays premium to the RMCs for bulk purchase of foreign currency and travellers cheques. He submitted, since, the RMCs hold these foreign currency/travellers cheques as their stock in trade and sell them to the assessee as goods it is a direct sale transaction between two principals and there is no principal agent relationship. He submitted, the assessee has not appointed RMCs as its agents to procure/collect foreign exchange and travellers cheques from tourists. Therefore, provisions of Section 194H are not attracted. Explaining further the reasons for not deducting tax on premium the learned A.R. submitted, the assessee also sells foreign exchange to persons in need of such currencies. Generally, persons in need of foreign currency are brought by various travel agents to the assessee for sale of foreign currency. He submitted, commission is paid to the travel agents who bring customers to the assessee for purchase of foreign currency. He, therefore, submitted both these transactions cannot be equated. Hence, the assessee has deducted tax at source under section 194H of the Act in respect of sales of foreign currencies to different persons who are referred to by various travel agents. As far as purchase of foreign currency in block from RMCs, it is not a case of payment of commission but a premium was paid on the basis of difference between the RBI rate and the purchase price at which the RMCs have purchased the currency from tourists. The A.R. submitted, though, the assessee has paid premium at other places also, disallowance has only been made in Goa, and that too, only in the captioned assessment year. The difference between the premium and commission payment and the details of commission paid and premium paid were placed in the paper book. The assessee had shown the foreign currency as its stock and the RMCs had also shown it as stock in their books of account, therefore, it is nothing but a purchase and sale transaction between two principals. Therefore, it will not attract the provisions of Section 194H and consequently section 40(a)(ia) of the Act.
The D.R. relied upon the observations of the CIT(A).
The learned Members of the ITAT considered rival submissions and perused the material on record. It was observed that the assessee has a foreign exchange division approved by the RBI and is authorised to buy foreign exchange and travellers cheques from RMCs and others and sell them to persons in need of them. RMCs are also authorised by RBI to buy foreign currency from non residents visiting various places in India. These facts would show that the RMCs are not agents of the assessee but are appointed by RBI. Though, it may be a fact that the assessee buys foreign currency from RMCs depending upon the needs, however, there is no principal agent relationship between the assessee and the RMCs. The RMCs are free to sell foreign currency bought from tourists to assessee, RBI or any other person authorised by the RBI to deal in foreign currency. It is also to be noted that both the RMCs as well as the assessee have shown foreign currency as their stock in trade. The assessee has no relationship with the persons from whom the RMCs purchase foreign currency and the assessee is no way connected to the concerned tourists. Therefore, in our view the transaction between the assessee and the RMCs is on principal to principal basis and there is no principal agent relationship existing between them. Merely because in the financial statement assessee has debited the amount as commission it cannot be treated so without looking at the real nature of the transaction. The AO must bring on record material to establish that there is a principal agent relationship existing between the assessee and the RMCs. No enquiry has been made by the AO with the RMCs to find out the real nature of transactions between them. Further, assessee’s contention that in no other place in India such premium paid has been disallowed requires to be taken note of. It is also relevant to observe, even in respect of premium payment in Goa, except, the impugned assessment year in no other assessment year such disallowance under section 40(a)(ia) of the Act has been made. The ITAT inclined to delete the addition made by the AO.