Mahindra & Mahindra Ltd. Vs DCIT (ITAT Mumbai)
Payments made by the assessee to its dealers for providing free services in lieu of service coupons is not in the nature of any reimbursement of expenditure incurred by such dealers, and is in fact in the nature of payment of consideration pursuant to a contract, as per which the dealer provides such services to the ultimate customers. Accordingly, in our considered view the assessee was obligated to have deducted tax at source at the time of making of such payments towards service coupons to its dealers.
FULL TEXT OF THE ITAT JUDGEMENT
The present appeal filed by the assessee is directed against the order passed by the CIT(A)-5, Mumbai, dated 06.10.2016 which in turn arises from the order passed by the A.O under Sec.143(3) r.w.s 254 of the Income Tax Act, 1961 (for short ‘I-T Act’), dated 31.03.2014 for A.Y. 2007-08. The assessee has assailed before us the order passed by the CIT(A) on the following grounds of appeal :
“Being aggrieved by the order passed by the Commissioner of Income-Tax (Appeals) 5, Mumbai [hereinafter referred to as ‘CIT(A)’], the appellant submits following grounds of appeal for your sympathetic consideration :
(1) Disallowance of Service Coupon of Rs. 35,49,01,000/- u/s. 40(a) (ia)
On the facts and in the circumstances of the case and in law the learned CIT(A) erred in confirming disallowance of Service Coupon of Rs. 35,49,01,000/- u/s 40(a)(1a), rejecting the Appellant’s contention that tax was not deductible on service coupon under Section 194C.
Without prejudice to the above, the learned CIT(A) ought to have appreciated that since the Appellant was not held to be an assessee in default u/s 201 of the Act, it cannot be held that the Appellant had failed to deduct tax at source in accordance with the provisions of the Act so as to merit disallowance u/s 40a(la) of the Act.
In any event, the time limit for passing an order u/s 201 for the FY 2006-07 (AY 2007-08) having expired, the assessee could not now be deemed to be an assessee in default.
In any event, the learned CIT(A) ought not to have made disallowance u/s 40a(la) in those cases where the payees had filed their returns of income and paid tax due there under for the relevant assessment year, there being thus no subsisting tax liability of the payee which would entitle the Appellant to claim deduction under the proviso to the section at any subsequent point of time.
The addition made by the learned CIT(A) being contrary to the provisions of law be deleted.
Your Appellant reserves the right to add to, alter or amend any of the above grounds of appeal, if felt necessary.”
2. Briefly stated, the assessee company which is engaged in the business of manufacturing of automobile vehicles, tractors etc. had filed its return of income for A.Y. 2007-08, declaring total income at Rs.958,35,15,817/-. Original assessment under Sec.143(3) r.w.s 144C of the I-T Act was completed on 26.10.2010 assessing its total income at Rs.2588,51,62,830/-. The assessee assailed the matter in appeal before the CIT(A), who partly allowed the same. Aggrieved, both the assessee and the revenue filed cross-appeals against the order of the CIT(A) before the Tribunal. The Tribunal while disposing off the cross-appeals, vide its order passed in ITA No. 7999/Mum/201 1, dated 08.06.2012 allowed certain reliefs and restored certain issues to the file of the A.O for fresh adjudication. One of the issue that was set aside by the Tribunal to the file of the AO was the disallowance of the payments made by the assessee to its dealers towards service coupons of Rs.35,49,01,000/- under Sec.40(a)(ia) of the I.T Act.
3. The A.O while giving effect to the directions of the Tribunal, vide his order passed under Sec. 143(3) r.w.s 254, dated 31.03. 2014, had inter alia upheld the disallowance of service coupons of Rs.35,49,01,000/- under Sec.40(a)(ia).
4. Aggrieved, the assessee carried the matter in appeal before the CIT(A), who upheld the disallowance u/s 40(a)(ia) of the payment of Rs. 35,49,01,000/- made by the assessee to its dealers towards service coupons. The CIT(A) while concluding as hereinabove, observed, that a similar disallowance u/s 40(a)(ia) made by the A.O in the case of the ‘sister concern‘ of the assessee was upheld by the Tribunal in viz. M/s Mahindra Navi Star Automobiles Ltd. Vs. DCIT (ITA No.3324 & 4645/Mum/2013, dated 13.05.2016) for A.Ys 2007-08 & 2008-09. It was observed by the CIT(A) that the Tribunal while disposing off the aforementioned appeals of the ‘sister concern‘ of the assessee had upheld the disallowance made by the A.O u/s 40(a)(ia), as it had failed to deduct tax at source u/s 194C at the time of making of payments to its dealers towards the service coupons. On the basis of his aforesaid observations the CIT(A) upheld the disallowance u/s 40(a)(ia) of Rs. 35,49,01,000/- made by the A.O.
5. The assessee being aggrieved with the order of the CIT(A) has assailed the sustaining of the disallowance under Sec.40(a)(ia) of Rs.35,49,01,000/- in appeal before us. Succinctly stated, the value of the service coupons are factored by the assessee into the sale price at the time of sale of vehicles to its dealers for an ascertained price. In turn, the dealer makes onward sales to the customers at a price which includes free service obligations. The service coupons enable the ultimate customer to obtain certain number of services for their vehicles from any of the dealer forming part of the network of the dealers of the assessee across the country. As a matter of fact, the consideration for the services being embedded in the sale price of the vehicle is paid for by assessee at the time of purchase of the vehicle. At the time of availing the free service, the customer presents the service coupon to the dealer, who in turn provides the service for the vehicle without charging for the same. Subsequently, the dealer presents the service coupons to the assessee company, which in turn pays a predetermined sum of money to the dealer. The A.O while framing the assessment was of the view that the payment made by the assessee company to its dealer was pursuant to a contract, as per which the dealer was providing services on behalf of the assessee in lieu of money. In fact, it was also observed by him that as was discernible from the ‘dealership agreement‘, the amount of the service coupon was based on the cars sold by the assessee to the dealers. As such, the A.O holding a conviction that as there was principal-to-agent relationship in the aforesaid transaction, thus the assessee was obligated to deduct tax at source under Sec.194C at the time of making of such payment to the dealers. As the assessee had failed to comply with its statutory obligation and had not deducted tax at source as per the mandate of Sec.194C, therefore, the A.O in the backdrop of his aforesaid conviction disallowed u/s 40(a)(ia) the payment of Rs.35,49,01,000/-that was made by the assessee towards service coupons to its dealers. As observed hereinabove, the CIT(A) on appeal was persuaded to subscribe to the view taken by the A.O and had upheld the aforesaid disallowance made by him u/s. 40(a)(ia).
6. The ld. Authorized Representative (for short ‘A.R‘) for the assessee, at the very outset of the hearing of the appeal submitted, that as the payment made by the assessee company to its dealers for the service coupons was towards reimbursement of expenses incurred by them for providing free services to the ultimate customers, thus no obligation was cast upon the assessee to deduct tax at source under Sec.194C while making of such payments. The ld. A.R took us through the facts of the case to the extent the same were relevant to the issue under consideration. It was submitted by him that the appeal of the assessee was earlier disposed off by the Tribunal vide its order viz. Mahindra & Mahindra Ltd. Vs. DCIT-2(2), Mumbai (ITA No 7999/Mum/2011, dated 08.06.2012). However, as the issue pertaining to disallowance under Sec. 40(a)(ia) of the payments made by the assessee towards service coupons to its dealers was not adjudicated while disposing off the appeal, therefore, the Tribunal had vide its order passed in M.A. No. 397/Mum/2012, dated 03.10.2012 remitted the matter to the file of the A.O. The ld. A.R drew our attention to the submissions which were made by the assessee before the A.O in the course of the set aside proceedings. The ld. A.R taking us through a sample ‘Invoice‘ that was raised by the assessee on sale of vehicles to its dealer, submitted, that the same included the value of service coupon charges. It was submitted by the ld. A.R that the service coupon charges was a part of the sale price, and the assessee would make a provision for service charges in its books of accounts. The ld. A.R further drawing our attention to a sample ‘dealer agreement‘, submitted that the relationship between the assessee company and the dealer was clearly as that of principal to principal basis. It was further submitted by him that in the aforesaid ‘agreement‘, it was clearly mentioned that the dealer was not to be considered as an ‘agent‘ or ’employee‘ of the company for any purpose. Further, the ld. A.R took us through the observations of the CIT(A) in context of the issue under consideration. It was the claim of the ld. A.R that as reimbursement of expenses did not attract any obligation to deduct tax at source, therefore, the assessee could not be held as being in default for not deducting tax at source under Sec.194C. In nutshell, it was the contention of the ld. A.R that as the assessee was not obligated to deduct any tax at source at the time of reimbursement of the amount of service coupon charges to the dealer, thus no disallowance under Sec. 40(a)(ia) was called for in its hands. Alternatively, it was submitted by the ld. A.R that as the assessee had not been deemed to be an assessee in default under the first proviso to sub-section (1) of Sec.201, therefore, as per the second proviso to Sec. 40(a)(ia) it shall be deemed that the assessee had deducted and paid the tax on such sum on the date of furnishing of return of income by the resident payees referred to in the said proviso. In support of his aforesaid contention the ld. A.R relied on the judgment of the Hon‘ble High Court of Delhi in the case of CIT Vs. Ansal Land Mark Township (P) Ltd. (2015) 377 ITR 635 (Del). Apart there from, it was the claim of the ld. A.R that in case the assessee was still to be held as being in default under Sec.40(a)(ia) then the disallowance, if any, shall liable to be restricted to the extent of 30% only. Further, the ld. A.R in order to impress upon us that no disallowance under Sec. 40(a)(ia) was called for in the hands of the assessee, relied on the judgement of the Hon‘ble Supreme Court in the case of CIT Vs. Kotak Securities Ltd. (2016) 383 ITR 1 (SC).
7. Per contra, the ld. Departmental Representative (for short ‘D.R’) submitted that as the payments made by the assessee company to its dealers for providing services to the vehicles of the customers was a contractual payment, thus the assessee remained under an obligation to deduct tax at source at the time of making of payment/credit of the said amount to the respective dealers. It was averred by the ld. D.R that as the assessee had failed to comply with the aforesaid statutory obligation and had not deducted tax at source as per the mandate of Sec.194C, therefore, the said amount of Rs.35,49,01,000/- was rightly disallowed by the A.O under Sec.40(a)(ia), which thereafter was upheld by the CIT(A).
8. We have heard the authorized representatives for both the parties, perused the orders of the lower authorities and the material available on record and the judicial pronouncements relied upon by them. We find that our indulgence has been sought by the assessee for adjudication of two issues viz. (i) that as to whether the assessee company was obligated to deduct tax at source under Sec. 194C at the time of making payments to its dealers towards the service coupons which were surrendered by the customers with them for availing services of their vehicles from the said dealers; and (ii) that now when the assessee company had not been held to be an assessee in default under the first proviso to sub-section (1) of Sec.201, then whether the amounts paid to the dealers for the service coupons would be liable for disallowance under Sec.40(a)(ia) of the I.T Act.
9. Admittedly, the assessee at the time of making the payments to its dealers towards the service coupons had not deducted any tax at source. In order to appreciate the issue under consideration, we are of the considered view that it would be relevant to briefly cull out the business model of the assessee company to the extent the same is relevant for adjudicating the present case. The assessee company which is engaged in the business of manufacturing of automobile vehicles, tractors etc., sells its vehicles through a wide network of dealers spread across the country. As a consistent practice in the automobile industry, the purchaser of the vehicle is entitled for availing certain number of free services of the same after it had touched different milestones, which may be reckoned in terms of mileage, lapse of time etc. In sum and substance, the purchaser of the vehicle (or anyone to whom the ownership of the vehicle had subsequently been transferred) redeems the service coupon with a dealer at the time of getting his vehicle serviced free of cost. As observed hereinabove, the value of the service coupons are factored by the assessee into the sale price at the time of sale of vehicles to its dealers for an ascertained price. In turn, the dealer makes onward sales to the customers at a price which includes free service obligations. In nutshell, the customer at the time of purchasing the vehicle pays for the value of the service coupons which is embedded in the sale price itself. As the value of service coupon recovered by the assessee company and forming part of its ‗sale invoices‘ stands credited in its profit and loss account at the time of booking the sales, therefore, a provision is made for the unexpired service coupons appearing at the end of the year. In terms of the aforesaid arrangement, the dealers are obliged to render free services to the customers on surrendering of the free service coupons by them, subject to satisfaction of the time limit/mileage parameters fixed by the assessee company. As at the time of sale of the vehicle, it is not ascertainable as to from which dealer the customer would avail the free services, therefore, for said reason the authorized dealer through whom the vehicle is sold is not paid for the services (value of which is embedded in the sale price of the vehicle sold to the customer) at the time of its sale. In fact, the customer cannot be bound to avail the free services from the specific authorized dealer from whom he had purchased the vehicle and remains at a liberty to avail the services of any of the authorized dealer of the assessee company spread across the country. In terms of the aforesaid arrangement the assessee company enters into a back up contract (appointment) with its dealers, as per which the dealers are obliged to provide free services to a vehicle sold by the assessee through any dealer as long as the same satisfies the conditions of warranty against the service coupon. After the customer had availed the free service from the dealer on surrendering of the service coupon, the latter in turn is paid the predefined amount by the assessee company. As a matter of fact, as the customer had already paid for the free service at the time of purchase of the vehicle (as a part of the cost of the vehicle), therefore, he is not required to pay for the same while availing such services from the dealer. Rather, the dealer who carries out the work of providing service to the customers vehicle is thereafter paid by the assessee company which had already received the consideration for such free services from its customers as a part of it sale price. In sum and substance, as the assessee had already recovered the value of free services at the time of sale of the vehicle, thus the dealer by carrying out the service of the vehicles in lieu of the service coupons, in fact, by so doing discharges the liability or the obligation of the assessee company viz. the manufacturer of the vehicle towards the customers. On a perusal of the aforesaid arrangement, it can safely be concluded that as the dealers provide free services to the vehicles of the customers in discharge of the obligation of the assessee company towards such customers, therefore, the assessee company is the actual beneficiary of the value of the services provided by the dealers. Succinctly stated, as the customer pays for the free service entitlement at the time of purchase of the vehicle, therefore, the assessee company remains under an obligation to provide such free service to the customers as and when such person approaches the authorized dealer for availing of such services. Resultantly, the assessee company in order to honour its commitment made to the customers at the time of sale of the vehicle enters into a back up contract with its dealers spread across the country, as a result whereof, the latter are obliged to provide services to the vehicles that satisfies the conditions of warranty against the service coupons.
10. In the backdrop of our aforesaid deliberations, we are of the considered view that the payments made by the assessee to its dealers for providing free services in lieu of service coupons is not in the nature of any reimbursement of expenditure incurred by such dealers, and is in fact in the nature of payment of consideration pursuant to a contract, as per which the dealer provides such services to the ultimate customers. Accordingly, in our considered view the assessee was obligated to have deducted tax at source at the time of making of such payments towards service coupons to its dealers. As is discernible from the orders of the lower authorities, as the assessee had failed to deduct tax at source as per mandate of Sec.194C, therefore, the lower authorities had rightly concluded that the said amount was liable to be disallowed under Sec. 40(a)(ia) of the I-T Act.
11. Apart there from, we find that the issue as to whether an assessee which is into manufacturing of automobile vehicles etc. remains under a statutory obligation to deduct tax at source under Sec.194C at the time of making of payments to its dealers for providing services to the ultimate customers in lieu of free service coupons surrendered by them, had been deliberated at length by a coordinate bench of the Tribunal viz. ITAT ―B‖ Bench, Mumbai in the case of a ‗sister concern‘ of the assessee viz. Mahindra & Mahindra Automobiles ltd Vs. DCIT, 2(2) viz. (ITA No. 3324 & 4645/Mum/2013, dated 13.05.2016). In the aforesaid case, it was observed by the Tribunal that as the free services provided by the dealers to the ultimate customers was in discharge of the obligation cast upon the assessee company towards the customers to provide such services, therefore, the payments made by the assessee company to the dealers obligated the assessee to deduct tax at source under Sec. 194C at the time of making of such payments to them. The Tribunal in its aforesaid order had observed as under:
“6. We have heard the parties, and perused the material on record.
6.1 We would firstly be required to see if the tribunal‘s order in Hero Motocorp Ltd. (supra) can be said to cover the assessee‘s case in-as-much as, where it is found as so, we may not be required to issue any independent findings. We may firstly begin by reproducing the relevant paras of the impugned order, delineating the respective cases of both the sides, as under:
‘4.3 As regards service coupon commission disallowed by the AO u/s 40(a)(ia) r.w.s. 194C, the facts as stated by the appellant are as under :-
(i) Service coupon amount is fixed class of vehicle-wise. During 2006-07, only LCVs were sold for which the amount of service coupon per vehicle was Rs.2500, as already stated in our earlier communications.
(ii) For HCVs, the sale of which started in subsequent years, the amount of service coupon is Rs.5000/- (Rs.6000/- from June’12 onwards).
(iii) Accounting for service coupon amount happens as under:
(iv) The value of service coupon recovered as part of the Sale Price shown in the Sales invoice is credited to an Income Account styled Service tax Coupon 5 ITA Nos. 3324 & 4645/Mum/2013 (A.Ys. 2007-08 & 2008-09) Mahindra Navistar Automotives Limited vs. Dy. CIT Account. This entry is passed at the time of recording sales to the dealer. A snap shot of the accounting entry passed in the SAP system is given below.
(v) Since full amount of credit is already taken to the P&L Account at the time of booking the sale, a provision is made for the unexpired service coupons at the end of the year.
(vi) In respect of free services the dealer is obliged to render only free service to the customer. In the case of service coupons the customer redeems the service coupon with the dealer on servicing the vehicle. Replacement of parts does not form part of free service. The service coupon is surrendered to the company for payment purposes.
(vii) In the case of a vehicle covered under warranty, the customer brings the vehicle at dealer’s location for replacing the defective part. The dealer then replaces that spare-part from his own stock and uses his own labor for replacing same. Later, the dealer recovers cost of spare as well as labor cost from the assessee through a Warranty claim Debit Note. Presently the dealer can file his claim through the company’s portal which is subsequently settled by the company’s customer care department. Warranty claims when settled are debited to Warranty Provision account and credited to Dealer’s account.
(viii) Where the vehicle is not in warranty, such costs are recovered from the customer.
(ix) Thus the fact remains that the entire amount of recovery for service coupon is offered for tax at the time of booking the sale. A provision is made for unexpired service coupons at the end of the year. Value of such service coupons being part of the sale price itself, it is the customer himself who pays the dealer for the value of the service coupon when he buys the vehicle purchased by the dealer from the company. The provisions of s 194C are not therefore applicable. The dealer does not carry out any work for the company when he services the customer’s vehicle at his service station.
(x) Snap Shot of the accounting entry passed in the SAP system is as under:
