J.D. Marketing Vs ITO (ITAT Kolkata)
No TDS on Retailer Incentives Paid Directly by AIRCEL: ITAT Deletes Disallowance
The Kolkata Bench of the Income Tax Appellate Tribunal, in J.D. Marketing v. ITO, Ward 37(1), Kolkata, deleted a disallowance sustained under Section 40(a)(ia) concerning retailer incentives directly credited by AIRCEL. The Tribunal held that Section 194H did not apply on the facts because the assessee had neither earned the retailers’ share as real income nor separately disbursed commission under a principal–agent arrangement.
The decision highlights that gross accounting entries and TDS reporting cannot, by themselves, establish an obligation to deduct tax.
Facts of the Case
The assessee, a partnership firm, carried on the business of distributing mobile SIM cards and value-added cards for AIRCEL/DWL. For the year discussed in the lead appeal, it declared total income of ₹3,06,540.
Its profit and loss account reflected total commission and incentives of ₹53,85,555.79, including ₹40,71,093 relating to incentives payable or passed on to retailers.
During assessment, the Assessing Officer treated retailer incentives amounting to ₹36,63,971 as payments attracting TDS under Section 194H. Since the assessee had not deducted tax, the officer disallowed the entire amount under Section 40(a)(ia).
The CIT(A) upheld the applicability of Section 194H, concluding that the agreement with AIRCEL/DWL established a principal–agent relationship between the distributor and retailers. However, the appellate authority restricted the disallowance to 30%, amounting to ₹10,99,191, referring to the amendment introduced by the Finance (No. 2) Act, 2014.
Assessee’s Contentions
The assessee argued that its transactions with retailers were on a principal-to-principal basis. Crucially, AIRCEL directly credited the incentives into the retailers’ bank accounts.
AIRCEL nevertheless deducted tax on the gross amount against the assessee’s PAN. Accordingly, the assessee recorded gross commission income and corresponding retailer payouts to reconcile its books with Form 26AS and the TDS certificate.
The assessee maintained that these entries did not represent commission separately paid by it. The retailers’ share was neither its real income nor expenditure independently incurred through a commission arrangement.
It relied on PCIT v. Shalimar Chemical Works Ltd. and CIT v. United Breweries Ltd. to support the distinction between trade incentives and commission arising from an agency relationship.
Revenue’s Stand
The Revenue supported the lower authorities’ orders. It submitted that the retailers operated under the distributor’s control and appointment, with AIRCEL’s approval. According to the Revenue, these contractual features established an agency relationship, making deduction under Section 194H mandatory.
Tribunal’s Findings
The Tribunal examined the actual payment arrangement and found that AIRCEL directly credited the incentives to the retailers’ bank accounts. AIRCEL also deducted TDS on the full amount under the assessee’s PAN.
The assessee’s gross accounting treatment served to reconcile those transactions with Form 26AS. The Tribunal found that no real income accrued to the assessee on the retailers’ share, and the assessee did not separately disburse commission from its own funds so as to establish the alleged principal–agent arrangement.
Referring to Shalimar Chemical Works Ltd., the Tribunal explained that target incentives do not attract Section 194H where the requisite principal–agent relationship is absent. A trade incentive or discount cannot automatically be treated as commission merely because it appears within an incentive structure.
On the facts before it, the primary condition for applying Section 194H was not satisfied. Consequently, the assessee could not be treated as an assessee in default for the alleged non-deduction.
Disallowance Deleted
The Tribunal held that once the obligation under Section 194H failed, the consequential disallowance under Section 40(a)(ia) could not survive, whether calculated at 100% or 30%.
It therefore deleted the ₹10,99,191 sustained by the CIT(A). Since the issues in the companion appeal were identical, the same reasoning applied to that appeal. Both appeals were allowed.
Author’s Comments
The ruling underscores the need to examine contractual substance, entitlement to income, and the actual flow of incentives before treating accounting entries as commission payments.
For distributors, the practical lesson is to maintain agreements, retailer payment evidence, incentive statements, and reconciliations explaining differences between Form 26AS receipts and income actually earned. Such records can establish why a gross credit against a distributor’s PAN does not necessarily represent income belonging entirely to that distributor.
However, the decision should be understood in its factual setting. Direct payment by a telecom operator is not, by itself, a universal exemption from Section 194H. The Tribunal’s conclusion also rested on the absence of the relevant agency relationship and the nature of the assessee’s accounting entries.
Finally, the Tribunal deleted the disallowance entirely; its decision should not be presented as an independent ruling on the retrospective applicability of the 30% restriction.
Cases Discussed
- PCIT Vs Shalimar Chemical Works Ltd. — [2018] 257 Taxman 590 (Calcutta High Court). The High Court held that target incentives paid to dealers for increasing sales did not attract TDS under Section 194H where no principal–agent relationship existed. This decision was expressly relied upon and discussed by the Tribunal. TaxGuru discussion of the judgment.
- CIT Vs United Breweries Ltd. — [2017] 80 taxmann.com 123 (Andhra Pradesh and Telangana High Court). Cited by the assessee in support of its arguments concerning incentives, commission and Section 194H. The Tribunal referred generally to the cited judicial precedents but did not separately reproduce the reasoning of this decision.
FULL TEXT OF THE ORDER OF ITAT KOLKATA
This are the appeals filed by the assessee is directed against the order dated 25.02.2026 of the Office of the Commissioner of Income Tax passed under Section 143(3)r.w.s263 of the Assessment Year 2013-14 and 2015-16 of the Income-Tax Act, 1961 (hereinafter referred to as “the Act”). In both appeals issues are common and identical so taken up together for disposal by taking ITA No. 1493/2026 as a lead case.
2. Brief facts of the case of the assessee is that the assessee is a partnership firm engaged in the business of distributorship of mobile SIM cards and value-added cards (for AIRCEL / DWL). For the year under consideration, the assessee filed its return of income declaring a total income of ₹3,06,540/. During assessment proceedings under Section 143(3), the learned Assessing Officer (“AO”) observed that total commission/incentive of ₹53,85,555.79 was shown in the profit and loss account, which included ₹40,71,093/- pertaining to incentives payable/passed on to retailers. The AO invoked the provisions of Section 194H for non-deduction of tax at source (TDS) on payments/incentives to retailers amounting to ₹36,63,971/- and disallowed the entire amount under Section 40(a)(ia) of the Act.
3. Aggrieved by the said order, assessee preferred appeal before the CIT(A) where in appeal of the assessee has been partly allowed as the Ld. CIT(A) held that a principal-agent relationship existed between the assessee and the retailers based on the clauses of the agreement with AIRCEL/DWL. Consequently, the Ld. CIT(A) held Section 194H applicable. However, granting partial relief under Ground No. 4, the Ld. CIT(A) restricted the disallowance under Section 40(a)(ia) to 30% of ₹36,63,971/-, i.e., ₹10,99,191/-, in light of the amendment brought in by the Finance (No. 2) Act, 2014.
4. Being aggrieved by and dissatisfied with the order of Ld. CIT(A) upholding the applicability of Section 194H and sustaining the disallowance to the extent of ₹10,99,191/-, the assessee has preferred appeal before us by raising the following grounds of appeal:
i. That the assessment order passed by the learned Assessing Officer under section 143(3) and as partly sustained by the learned CIT(A) is bad in law, arbitrary and liable to be quashed, as the same has been passed without proper appreciation of facts and settled legal position.
ii. That the learned Assessing Officer and the learned CIT(A) have erred in law and on facts in invoking the provisions of Section 194H and consequently Section 40(a)(ia), by wrongly assuming existence of a principal–agent relationship, without appreciating that the arrangement was on principal-to-principal basis and the impugned incentives were not in the nature of commission.
iii. That the learned Assessing Officer and the learned CIT(A) failed to appreciate that no real income was received nor any actual payment was made by the appellant to the retailers, and the entries in the books were merely accommodative to account for TDS deducted by AIRCEL on the appellant’s PAN, thereby rendering the provisions of TDS wholly inapplicable.
iv. That the learned Assessing Officer and the learned CIT(A) erred in making and sustaining disallowance under Section 40(a)(ia) in absence of any actual expenditure or payment by the appellant, ignoring the fundamental condition precedent for invoking the said provision.
v. That the learned Assessing Officer and the learned CIT(A) have erred in placing reliance on third-party information obtained under section 133(6) without conducting independent enquiry or granting opportunity of cross-examination, thereby violating the principles of natural justice.
vi. That the learned CIT(A) erred in sustaining disallowance to the extent of 30% amounting to ₹10,99,191/-, without appreciating that once the primary conditions for applicability of Section 194H and Section 40(a)(ia) fail, no disallowance could survive.
vii. That the learned Assessing Officer and the learned CIT(A) have failed to consider and apply the settled judicial principles distinguishing trade incentives/discounts from commission, thereby rendering the impugned addition unsustainable in law.
viii. That the appellant craves leave to add, amend, alter or withdraw any of the above grounds at or before the time of hearing.
4.1. The Ld. Authorized Representative (AR) submitted that the transaction between the assessee (distributor) and retailers is on a principal-to-principal basis. AIRCEL directly pays/credits incentives to the bank accounts of retailers, and TDS on the total gross amount is deducted by AIRCEL under the assessee’s PAN. The assessee merely routes the entries through its books to reflect the gross commission income and corresponding retailer payout to align with the Form 26AS/TDS certificate issued by AIRCEL. Since no actual payment or expenditure was incurred by the assessee directly to the retailers as an agent-principal commission, Section 194H has no application. He has placed reliance on the decision of the Hon’ble Calcutta High Court in PCIT vs. Shalimar Chemical Works Ltd. [2018] 257 taxmann.com 590 and Hon’ble Andhra Pradesh & Telangana High Court in CIT vs. United Breweries Ltd. [2017] 80 taxmann.com 123.
5. Contrary to that the Ld. DR supported the orders of the lower authorities and submitted that as per the agreement clauses, the retailer works under the control and appointment of the distributor with the approval of AIRCEL, establishing a principal-agent relationship. Therefore, TDS under Section 194H was mandatory.
6. We have heard the rival submissions, perused the material available on record, and considered the judicial precedents cited. The primary issue for determination is whether the provisions of Section 194H apply to trade incentives/discounts or payments directly disbursed by the primary principal (AIRCEL) to retailers, and whether the assessee was under an obligation to deduct TDS on the same. From the facts on record, it is evident that the payment/incentive was directly credited by AIRCEL into the bank accounts of the retailers. AIRCEL deducted TDS on the full amount under the PAN of the assessee. The assessee merely accounted for the same on a gross basis to reconcile with Form 26AS. No real income accrued to the assessee on the retailer share, nor was any separate payment of commission disbursed by the assessee out of its own funds to create a principal-agent relationship under Section 194H.
6.1. The Hon’ble High Courts have consistently laid down that where transactions take place on a principal-to-principal basis or where discount/incentive is given without the existence of an agency relationship, Section 194H is not attracted. In the case of Shalimar Chemical Works Ltd. (Supra) it has been held thus- Where assessee paid target incentives to dealers for increasing sales for its products, since there was no relationship of principal and agent between assessee and distributors, assessee was not required to deduct tax at source u/s 194H while making said payments. Since the primary condition for triggering Section 194H (i.e., payment of commission/brokerage under a principal-agent relationship by the assessee) is absent, the assessee cannot be held to be an “assessee-in-default” for non-deduction of TDS. Consequently, when the charge under Section 194H fails, no disallowance under Section 40(a)(ia) can survive—neither at 100% nor at the restricted 30% level. The Ld. CIT(A) erred in retaining the disallowance to the extent of ₹10,99,191/-.
7. Accordingly, the disallowance of ₹10,99,191/- sustained under Section 40(a)(ia) of the Act is hereby DELETED.
8. The issues are same and identical in ITA No. 1492/2026, so the decision of the tribunal in ITA No 1493/2026 as above shall also be applicable as mutatis mutandis in ITA No. 1492/26.
In the result both appeals of the assessee are allowed.
Kolkata, the 15th October, 2026.
