No TDS on discount/rebate allowed to dealers/distributors on sale of products

ASUS India Pvt. Ltd. Vs ACIT (ITAT Mumbai)

Conclusion: Disallowance made by AO under section 40(a)(ia) for non deduction of TDS on discount/rebate allowed to dealers/distributors on sale of products was not justified as there was no element of work as defined under clause (iv) of Explanation to section 194C and AO had not brought on record any material for deduction of  TDS under section 194H that the dealers/distributors were simply acting as intermediaries to facilitate sale of products to end users so as to infer a principal–agent relationship.

Held:  Assessee imported certain electronic goods such as notebooks, tablets, pad–phones, mobile phones and accessories and sold them in India through dealers/distributors who, in turn, sell them to end users. AO made disallowance under section 40(a)(ia) for the expenditure on account of discount given to the dealers/distributors under the conditional discount scheme. It was held that the rebate/discount given by assessee to dealers would not come either within the purview of section 194C or section 194H, therefore, would not require deduction of tax at source. A reading of section 194C would suggest that in respect of any payment made to a contractor/sub–contractor for carrying out any work, including supply of labour, would be subject to deduction of tax at source at the appropriate rate. In the present case, assessee had entered into a sale contract, simpliciter, for sale of its products to dealers/distributors. Certainly, the transaction between assessee and the dealers/distributors could not be termed as a contract for work. Assessee simply sold its products to dealers/distributors who, in turn, sell them to the end users. Therefore, there was no element of work as defined under clause (iv) of Explanation to section 194C. Therefore, under no circumstances, section 194C would be applicable to the discount/rebate. Assessee was simply selling its products to dealers/distributors who in turn sell them to end users. There was no contract of sale between assessee and end users so as to conclude that the dealers/distributors act as intermediary between assessee and the end users to facilitate sale of products. At least, the Department had not brought on record any material to establish the fact that the dealers/distributors were simply acting as intermediaries to facilitate sale of products to end users so as to infer a principal–agent relationship.  Thus, the rebate/discount given to the dealers/distributors would not attract the provisions of section 194H. The aforesaid statement of AO made it clear that he himself was not sure whether it was a payment for carrying out any work or was in the nature of commission / brokerage for any service rendered by another party in the course of buying and selling a product. That being the case, no disallowance under section 40(a)(ia) could be made.

FULL TEXT OF THE ITAT JUDGEMENT

Aforesaid appeals by the assessee arise out of two separate orders, both dated 30^th January 2020, passed by the learned Commissioner of Income Tax (Appeals)–16, Mumbai, for the assessment years 2016–17 and 2017–18.

2. The issues involved in the present appeal is basically related to disallowances made under section 40(a)(ia) of the Income Tax Act, 1961 (for short “the Act”) on account of expenditure claimed by way of sales rebate / discount given to the dealers / distributors.

3. Brief facts are, the assessee, a resident company, is engaged in the business of importing and trading in electronic goods, such as, notebooks, tablets, pad–phones, mobile phones and accessories. For the impugned assessment year, the assessee filed its return of income on 30^th November 2016, declaring total income of r 17,90,29,340. In the course of assessment proceedings, the Assessing Officer while verifying the audited accounts of the assessee noticed that the assessee has claimed the following adjustment against the gross sales.

Sales  Rs. 178,78,77,006

Less: Sales Return   Rs. 25,08,87,210

Sales Rebate Rs. 71,04,23,345 _Rs. 96,13,10,555

Net Sales  Rs. 1672,65,66,452

4. Insofar as the amount of sales return is concerned, the Assessing  Officer accepted the claim. However, insofar as the sales rebate is concerned, the Assessing Officer called upon the assessee to furnish the break–up of such rebate granted to the dealers/distributors with supporting details. After verifying the details furnished by the assessee, he noted that the sales rebate comprise of the following:–

5. After calling upon the assessee to explain why such rebate/discount given to the dealers/distributors were not subjected to deduction of tax at source under section 194C/194J/194H of the Act and not being convinced with assessee’s submissions, disallowed 30% out of the aforesaid payment/expenditure aggregating to r21,31,27,003, under section 40(a)(ia) of the Act and added back to the income of the assessee. Being aggrieved with the said disallowances, though, the assessee preferred appeal before the first appellate authority, however, the disallowance was sustained. This is how the assessee is in appeal before the Tribunal.

6. Ground no.1, being a general ground does not require specific

7. In ground no.2, the assessee has challenged the disallowance made under section 40(a)(ia) of the Act out of the expenditure on account of discount given to the dealers/distributors under the conditional discount scheme. As discussed earlier, during the assessment proceedings, on being called upon by the Assessing Officer to justify the discount/rebate given amounting to ` 42,13,01,780. It was submitted by the assessee that period wise and product wise scheme are floated to push sales for already launched models/slow moving items. He submitted, such benefit/rebate is based on dealers/distributors who ultimately sell the products in the market to the end users. Further explaining, it was submitted by the assessee that as per the discount scheme, the dealers/distributors sell the products at a special price which is below the maximum retail price (MRP). Therefore, the assessee gets a lesser margin on such sale. It was submitted, such special sales under project/tender, etc., the price quoted by the dealers/distributors are guided by special price set–ups. Therefore, to compensate the dealers/distributors for low margin, the assessee raises credit notes towards rebate/discount in favour of dealers/distributors. The Assessing Officer observed, the payment made by the assessee is out of contractual obligation or in the nature of commission. Therefore, such rebate/discount given to the dealers/distributors would get covered under section 194C/194H of the Act. The assessee having not deducted tax at the prescribed rate in terms of the aforesaid provisions, the Assessing Officer disallowed 30% out of the expenditure. As discussed earlier, the disallowance made was also upheld by the learned Commissioner (Appeals) accepting the reasoning of the Assessing Officer.

8. The learned Authorised Representative submitted, the assessee imports electronic goods such as note books, tablets, pad–phones, mobile phones and accessories for re–selling in India. He submitted, technology relating to these products gets upgraded/developed very fast and within a short period of launch of a particular product, it becomes obsolete. Therefore, the company conceives various rebate/discount schemes to push sales of such obsolete/slow moving products. Drawing our attention to Note–17 of the Profit & Loss Account, a copy of which is at Page–3 of the paper book, the learned Authorised Representative submitted, major revenue during the year was generated from sale of notebooks, tablets, pad–phones, mobile phones and accessories, which have a fiercely competitive market. Due to quick technological advance, these products become out dated/obsolete within a very short span, therefore, have to be sold at a discounted price. The learned Authorised Representative submitted, the assessee does not have any principal–agent relationship with any of the dealers/distributors and once the assessee sells/delivers the goods to the dealers/distributors, sale is complete. The assessee does not enter into any sales with the end users. Therefore, the sale contract between the assessee and the dealers/distributors ends on delivery of goods to them. That being the case, there is no principal– agent relationship. In this context, he drew our attention to the agreement entered with Flipkart India Private Ltd. (in short “Flipkart”). Drawing our attention to various clauses of such agreement, the learned Authorised Representative submitted, the agreement makes it clear that once the assessee sells goods to Flipkart, sale is complete. Therefore, there is no principal–agent relationship, but it is a principal– to–principal sale. That being the case, the provisions of section 194H of the Act would not be applicable. Drawing our attention to the tax invoice and credit note, the learned Authorised Representative submitted, these are simple sale transactions between two principals without involvement of any agency. Further, drawing our attention to the items sold, he submitted, these are slow moving goods and have to be sold with discount, otherwise, they cannot be sold at all. Thus, he submitted, the provisions of section 194H of the Act is not applicable. As regards applicability of section 194C of the Act, the learned Authorised Representative submitted, the transaction between the assessee being sale transaction of specific goods/items, it cannot be brought within the purview of section 194C of the Act, which is applicable only in respect of carrying out any work. Finally he submitted, though, similar rebate/discount was given in earlier years, no disallowances were made under section 40(a)(ia) of the Act. Thus, he submitted, disallowance made under section 40(a)(ia) of the Act for alleged violation of section 194C / 194H of the Act is legally unsustainable. In support of such contention, the learned Authorised Representative relied upon the following decisions:–

i) Ahmedabad Stemp Vendor Association v/s Union of India, [2002] 257 ITR 202;

ii) CIT v/s Ahmedabad Stamp Vendor Association, [2012] 348 ITR 378;

iii) CIT v/s United Beveries Ltd., [2017] 387 ITR 150; and

iv) CIT v/s Intervate India Pvt. Ltd., [2014] 364 ITR 238.

9. The learned Departmental Representative strongly relying upon the observations of the Assessing Officer and learned Commissioner (Appeals) submitted, the contract between the parties are not conclusive, therefore, the true nature and character of the transaction has to be examined to find out whether it is a transaction of sale between two principals or there is a principal–agent relationship. In this context, he relied upon the decision of the Hon’ble Supreme Court in Durga Prasad More, 83 ITR 540 (SC). To emphasis upon the fact that the contract of sale does not end with the sale made to the dealers/distributors, the learned Departmental Representative drew our attention to certain clauses of the contract between the assessee and Flipkart. The learned Departmental Representative submitted, as per the terms of the contract, the packaging of the goods is being carried out by the assessee. Further, the assessee also undertakes the liability to replace any defective goods. Drawing our attention to the copy of the invoice placed at Page–27 of the paper book, the learned Departmental Representative submitted, assessee’s contention that there is a principal–to–principal relationship with Flipkart and the sale contract concludes upon sale being effected to Flipkart is also incorrect as the assessee has raised the invoice in the name of end user i.e., Rashi Enterprises. Thus, he submitted, in the given facts of the case, Flipkart has acted as an agent between the assessee and the end user to whom the product has been ultimately sold. The learned Departmental Representative submitted, as per the terms of the contract with Flipkart, the assessee has to indemnify for any loss or defect in the product sold. That shows that there is no principal–to– principal relationship in respect of the sale made. He submitted, merely relying upon the contract one cannot determine the true nature and character of the transaction, but all other ancillary and incidental facts have to be seen. In support of this contention, the learned D.R. relied upon the decision of the Hon’ble P&H High Court in PMS Diesels & Ors v/s CIT, [2015] 374 ITR 562 (P&H).

10. In rejoinder, the learned Authorised Representative submitted, the learned Counsel for the Revenue has misconceived the facts as the assessee has not sold any product directly to the end user. As regards the invoice placed at Page–27 of the paper book referred to by the learned Departmental Representative, the learned Authorised Representative submitted, the invoice is raised in the name of another dealer/distributor namely Rashi Enterprises which is in no way connected to the sales effected to the Flipkart. In this context, he drew our attention to the invoice as well as the list of dealers/distributors to whom goods have been sold.

11. We have considered the rival submissions and perused the material on record. Admittedly, the assessee imports certain electronic goods such as notebooks, tablets, pad–phones, mobile phones and accessories and sells them in India through dealers/distributors who, in turn, sell them to end users. It is common knowledge that the products dealt by the assessee have fiercely competitive market and there is constant up–gradation/advancement in the technology concerning these products. As a result of such regular up–gradation / advancement in technology, the products become obsolete / outdated within a very short span of time and it becomes difficult to sell them in the market. Therefore, it is understandable that for pushing sale of such slow moving/outdated products, all the manufacturers dealing in such products provide rebate/discount schemes to sell their products at a rate below the MRP. Likewise, the assessee from time–to–time has formulated rebate/discount schemes for dealers/distributors towards sale of such products. Undisputedly, the rebate/discount given by the assessee to the dealers/distributors have been treated as payment coming within the ambit of section 194C/194H of the Act while making disallowance under section 40(a)(ia) of the Act.

12. Before we deal with the correctness of the aforesaid disallowance, it is necessary to briefly deal with certain crucial facts. It is evident from the material on record that during the year under consideration, the assessee had provided conditional rebate/discount of ` 42,13,01,780 to 29 distributors/dealers to whom various products, such as, notebooks, zenphones, tablets, zenpads, eeebooks, accessories, etc., were sold for a total amount of ` 1768,78,77,006. It is further relevant to observe, out of the 29 dealers/distributors to whom products were sold, the assessee had entered into a written contract only with Flipkart. On a perusal of the agreement with Flipkart, a copy of which is at Page–5 of the paper book, it is seen that as per the terms of the contract, the assessee is required to sell goods/products as per the purchase order to be placed by Flipkart. As per Para–(iii) of the agreement, the assessee is required to deliver the product to Flipkart in accordance with the specifications and prices as specified in the purchase order. Further, the terms of the agreement makes it clear that the total ownership to the products shall pass on to Flipkart at the time of delivery of such products to Flipkart. Para–(iv) of the agreement provides that Flipkart has to provide the assessee relevant information in order to supply products as sought by Flipkart from time–to–time. It further says that Flipkart shall make payment to the supplier in a timely manner as provided in the agreement. Para– (v) of the agreement sets out the obligation of the assessee towards Flipkart. Para–(vi) of the agreement provides for pricing and discount. Whereas, Para–(vii) provides for invoicing and payment. As per the aforesaid clause, the assessee is required to issue invoice to Flipkart from time–to–time with regard to supply of products. It further stipulates that invoice shall contain various details including the reference to relevant purchase order and item number, price, VAT details, etc. Para–(ix) provides that the assessee shall deliver the products to Flipkart in due time and in accordance with the delivery dates as mentioned in the purchase order.

13. So, from the aforesaid broad terms of the agreement, it is very much clear that it is a principal–to–principal sale contract and the contract of sale concludes once the goods/products are delivered to Flipkart at which point the ownership to the product passes on to Flipkart. Though, learned Departmental Representative drawing our attention to certain clauses of the contract, such as, requirement of the assessee to do the packaging of the goods products as well as the indemnity clause tried to impress upon the fact that it is not a principal–to–principal sale but is essentially a principal–agent relationship, however, we are unable to accept such contention. It is well settled legal principal that to ascertain the true intention of the parties, the contract has to be read as a whole and cannot be referred to in piecemeal manner. Therefore, simply relying upon certain clauses of the contract on a standalone basis, it cannot be said that it is a contract having principal–agent relationship. Insofar as the transaction with other dealers / distributors are concerned, the Revenue has not brought on record any material to negate assessee’s contention that it is a concluded sale transaction between two principals and there is no element of agency involved. The sample invoices, credit notes, etc., placed in the paper book clearly demonstrate the aforesaid factual position.

14. Having dealt with the facts involving in the issue, now we will deal with the legal aspect. Undisputedly, the Assessing Officer has disallowed the rebate/discount given under section 40(a)(ia) of the Act on the reasoning that such payments come within the purview of section 194C/194H of the Act. A reading of section 194C of the Act would suggest that in respect of any payment made to a contractor/sub–contractor for carrying out any work, including supply of labour, would be subject to deduction of tax at source at the appropriate rate. In the facts of the present case, the assessee has entered into a sale contract, simpliciter, for sale of its products to dealers/distributors. Certainly, the transaction between the assessee and the dealers/distributors cannot be termed as a contract for work. The assessee simply sells its products to dealers/distributors who, in turn, sell them to the end users. Therefore, there is no element of work as defined under clause (iv) of Explanation to section 194C of the Act. Therefore, under no circumstances, section 194C of the Act would be applicable to the discount/rebate.

15. Insofar as applicability of section 194H is concerned, a reading of the said section would make it clear that while making any payment which is in the nature of commission/brokerage other than insurance commission, would be subject to deduction of tax at the appropriate rate. Explanation to the aforesaid provision defines commission or brokerage to include any payment received or receivable directly or indirectly by a person acting on behalf of another person for services rendered or for any service in the course of buying or selling of goods. Thus, the primary conditions for qualifying as commission or brokerage are, the person receiving such payment must be acting on behalf of the payer and must be rendering some services in the course of buying or selling of goods. Undisputedly, in the facts of the present case, the dealers/distributors are not providing any service to the assessee in the course of buying or selling of goods. The assessee is simply selling its products to dealers/distributors who in turn sell them to end users. There is no contract of sale between the assessee and end users so as to conclude that the dealers/distributors act as intermediary between the assessee and the end users to facilitate sale of products. At least, the Department has not brought on record any material to establish the fact that the dealers/distributors are simply acting as intermediaries to facilitate sale of products to end users so as to infer a principal–agent relationship. In view of the aforesaid factual position, we have no hesitation in holding that the rebate/discount given to the dealers/distributors would not attract the provisions of section 194H of the Act. Our aforesaid view is well supported by the decisions cited by the learned Authorised Representative. In case of Ahmedabad Stamp Association (supra) affirmed by the Hon’ble Supreme Court, the Hon’ble Gujarat High Court after examining the true import of the term ‘commission’ and ‘discount’ and their basic difference and further, referring to the provisions of section 194H of the Act, has held that for attracting the aforesaid provision, the element of agency has to be there. The Hon’ble High Court while providing by way of illustration, the nature of transaction between a dealer in car and its manufacturer has observed that a service in the course of buying or selling of goods has to be something more than the act of simply buying or selling of goods. Therefore, the discount/rebate given cannot be termed as commission. The Hon’ble Andhra Pradesh High Court in United Beveries Ltd. (supra) while dealing with identical nature of dispute has held that when the sale transaction between two parties is on principal–to–principal basis, there is no element of service being rendered by one party to another and discount given to retailers is only for promoting sales, therefore, cannot be termed as commission. The Hon’ble Jurisdictional High Court in Intervate India Pvt. Ltd. (supra) has expressed similar view that when the relationship between the seller and buyer is that of a principal–to–principal, the discount given cannot be termed as commission. On the contrary, the decision in case of PMS Diesels & Ors. (supra) cited by the learned Departmental Representative is contextually different, hence, would not be applicable to the facts of the present case.

16. It is relevant to observe, in course of hearing the learned Departmental Representative drawing our attention to Page–27 of the paper book had submitted that the assessee has not directly sold its products to Flipkart but has sold to end users as the invoice is raised in the name of end user. However, on a perusal of the facts on record, we find the aforesaid submission of the learned Departmental Representative factually incorrect. A reference to Page–27 of the paper book would reveal that it has nothing to do with any sale effected to Flipkart but is in respect of a sale made to another distributor/dealer, Rashi Peripherals Pvt. Ltd. and such sale is co–related with the credit note issued in the name of the said party. In view of the aforesaid, we hold that the rebate/discount given by the assessee to the dealers will not coming either within the purview of section 194C or section 194H of the Act, therefore, would not require deduction of tax at source. At this point, it is relevant to observe, the Assessing Officer while invoking the provisions of section 40(a)(ia) of the Act has stated that it attracts section 194C / 194H of the Act. The aforesaid statement of the Assessing Officer makes it clear that he himself is not sure whether it is a payment for carrying out any work or is in the nature of commission / brokerage for any service rendered by another party in the course of buying and selling a product. That being the case, no disallowance under section 40(a)(ia) of the Act can be made. Accordingly, we delete the disallowance.

17. In ground no.3, the assessee has challenged the disallowance under section 40(a)(ia) of the Act amounting to ` 3,99,46,787, being 30% of the volume discount given of ` 13,31,55,945.

18. In the course of assessment proceedings, the assessee had submitted that the volume discount is given to dealers/distributors once the quarterly targets allotted to distributors are fulfilled. However, the Assessing Officer held that volume discount is nothing but in the nature of commission as it is essentially a reward given by the principal to its agent for achieving the target set for sales. Thus, he held that the payment has to be treated as commission as per section 194H of the Act and proceeded to compute disallowance under section 40(a)(ia) of the Act.

19. The leaned Counsel for the assessee submitted, volume discount is nothing but additional price support system provided to the dealers/distributors in respect of sale of certain specific products. The leaned Counsel submitted, in respect of such sale transactions, no third party is involved. Therefore, the provision of section 194H of the Act is not attracted. Further, he reiterated his submissions made in respect of ground no.2.

20. The learned Departmental Representative relied upon the observations of the Assessing Officer and learned Commissioner (Appeals).

21. Having considered rival submissions and perused the material on record, we are of the view that our reasoning while deleting the disallowance under section 40(a)(ia) of the Act in respect of ground no.2 would equally apply to this issue as well, since, the Revenue has failed to establish any principle–agent relationship between the assessee and the dealers/distributors to whom volume discount was given. Therefore, following our detailed reasoning given in respect of ground no.2, we delete the disallowance made by the Assessing Officer.

22. In ground no.4, the assessee has challenged the disallowance under section 40(a)(ia) of the Act made by the Assessing Officer in respect of reimbursement of octroi and insurance to dealers/distributors.

23. As could be seen from the facts on record, the assessee had reimbursed octroi paid on the products sold by the dealers/distributors as well as insurance claimed against ASUS products to the dealers/distributors on actual basis. The Assessing Officer was of the view that such reimbursement amounting to ` 4,13,94,071, is in the nature of commission as the liability to pay octroi and insurance claimed is solely on the dealers/distributors. Therefore, any reimbursement of octroi and insurance is in the nature of commission and will be covered under section 194C/194H of the Act. Accordingly, he disallowed an amount of ` 1,24,18,434, out of the expenditure claimed by invoking the provisions of section 40(a)(ia) of the Act.

24. The learned Commissioner (Appeals) also sustained the disallowance.

25. The leaned Counsel for the assessee reiterating the submissions made in respect of other disallowances made by the Assessing Officer, as contested in the earlier grounds, submitted that though the payment of octroi and insurance claimed are the liabilities of the dealers/distributors, however, the reimbursement of such payments on actual basis cannot be termed as commission or contract for work as provided under section 194C and 194H of the Act. He submitted, such payments were made purely keeping in view the business expediency. Thus, he submitted, no disallowance should be made.

26. The learned Departmental Representative submitted, the liability to pay octroi and insurance claimed is completely the burden of the dealers/distributors. Therefore, the reimbursement of such expenditure even on actual basis would be in the nature of commission.

27. We have considered rival submissions and perused the material on record. There cannot be any dispute that the payment of octroi and insurance claimed is the liability of the dealers/distributors. Just to incentivize the dealers/distributors, the assessee has reimbursed the payment made towards octroi / insurance claimed to the dealers / distributors on actual basis. However, in the facts of the present case, we are not called upon to decide the allowability of such expenditure at the hands of the assessee as business expenditure. The Assessing Officer himself has not disputed that the expenditure is allowable. The part disallowance made by him is only on account of alleged non– deduction of tax at source while making such payment. According to the Assessing Officer, the reimbursement of octroi and insurance claimed is covered under the provision of section 194C and 194H of the Act. As discussed in detail while dealing with ground no.2 (supra), we have held that neither there is any contract for work between the assessee and the dealers/distributors as provided under section 194C of the Act, nor there is any principal–agent relationship between the assessee and the dealers/distributors to treat the payment made as commission in terms of section 194H r/w its Explanation. Therefore, we are of the view that since the payment made by the assessee are not covered under section 194C/194H of the Act, no disallowance under section 40(a)(ia) of the Act could have been made. At the cost of repetition, we must observe that considering the limited issue arising in the present appeal as to whether the reimbursement of octroi/insurance claimed is covered under section 194C/194H of the Act, thereby, requiring deduction of tax at source, we refrain from expressing any opinion whether the expenditure is allowable as a business expenditure at the hands of the assessee. This ground is allowed.

28. In ground no.5, the assessee has challenged the disallowance made under section 40(a)(ia) of the Act in respect of payment made to dealers/distributors on account of refurbishing and repair of defective products.

29. Brief facts are, during the year under consideration, the assessee had incurred expenditure of ` 6,76,00,752, towards additional discount given to dealers/distributors to get the defective product repaired at their end. According to the assessee, to avoid getting the products back from the dealers/distributors getting them repaired and again re– selling them, the assessee asks the dealers/distributors to repair the products at their end and makes good the cost of such repair by reimbursing at fixed rate of 30%. The Assessing Officer was of the view that had the dealers/distributors would not have repaired the products, the assessee would have hired the services of a professional to undertake repairs. Therefore, the assessee would have been liable to deduct tax at source while making payment for such repairs to the professional as it would be covered under section 194C/194J of the Act. The assessee having failed to deduct tax at source, the Assessing Officer disallowed 30% amounting to ` 2,02,80,226, under section 40(a)(ia) of the Act. The disallowance was also sustained by learned Commissioner (Appeals).

30. The leaned Counsel for the assessee reiterated the submissions made before the Departmental Authorities. While doing so, he brought to the notice of the Bench the invoices raised and Credit Notes issued for reimbursement.

31. The learned Departmental Representative relied upon the observations of the Assessing Officer and learned Commissioner (Appeals).

32. We have considered rival submissions and perused the material on record. As regards applicability of section 194J, no material has been brought on record by the revenue to show that the payment made comes within the purview of fees for professional services, or fees for technical services or any other payment under sub section (1) of section 194J of the Act. Therefore, in our view, such payment will not come within section 194J of the Act.

33. Now, we will examine applicability of section 194C of the Act. As could be seen from the facts on record, if any of the products sold by the assessee to the dealers/distributors is found to be defective requiring repair/refurbishing, as a matter of policy, instead of getting back such defective goods from the dealers/distributors and getting them repaired, the assessee asks the concerned dealer/distributor to repair at their end and sell. To compensate such repair cost, the assessee allows 30% additional discount in respect of the defective products by issuing credit note. Thus, it is very much clear, ordinarily it is the duty of the assessee to repair/refurbish the defective products. Basically, as a matter of convenience, assessee has outsourced such work to the dealers/distributors and allowed additional 30% discount. In our view, this additional 30% discount given by the assessee towards cost of repair is nothing but payment made towards contract for work as described under section 194C of the Act. In fact, in the submissions made before the Assessing Officer the assessee itself has stated that such discount was provided for cost of labour. Therefore, we are of the view, the payment made towards refurbish / repair clearly comes within the ambit of section 194C of the Act. The assessee having failed to deduct tax at source in terms thereof, the disallowance made by the Assessing Officer under section 40(a)(ia) of the Act is sustained. This ground is dismissed.

34. In ground no.6, the assessee has challenged the disallowance of ` 1,40,91,023, being the provision for sales rebate under section 40(a)(ia) of the Act.

35. Brief facts are, during the assessment proceedings, the Assessing Officer noticed that the assessee has created provision for an amount of ` 4,69,70,076, towards sales rebate on the basis of ratio of percentage of sales rebate to sales of past years. Justifying such claim, the assessee has submitted before the Assessing Officer that the quantum of provision is computed after reversing the preceding years provision. The Assessing Officer, however, was not convinced with these submissions. He observed, the provision is nothing but a commission to incentivize the dealers/distributors. He observed, such working of provision does not consider any aspect of sales promotion done by the dealers/distributors during the current year. Thus, treating the provision made as commission under 194H of the Act, the Assessing Officer made the disputed disallowance under section 40(a)(ia) of the Act for the alleged failure on the part of the assessee to deduct tax at source. The learned Commissioner (Appeals) also upheld the disallowance.

36. The leaned Counsel for the assessee submitted, there being no principal agent relationship between the assessee and the dealer/distributor, the provision for sales rebate cannot be treated as commission under section 194H of the Act.

37. The learned Departmental Representative submitted, firstly the expenditure claimed by the assessee is merely a provision. Therefore, it cannot be allowed as expenditure. Further, he submitted, even if it is a provision still since the assessee has claimed it as deduction, TDS provision would be applicable. He submitted, mere mentioning of wrong provision by the Assessing Officer would not invalidate the disallowance made. Further, he submitted, though the Assessing Officer has not dealt with the allowability of the expenditure under section 37 of the Act, however, the Revenue can raise such plea before the Tribunal. In support of such contention, the leaned Counsel for the assessee relied upon the following decision:–

Pavankumar M. Sanghvi vs. ITO, [2017] 81 taxmann.com 208 (Ahmedabad – Trib.).

38. In rejoinder, the learned Counsel submitted, neither the Assessing Officer nor learned Commissioner (Appeals) had any doubt with regard to the genuineness or allowability of expenditure. A part disallowance under section 40(a)(ia) was made only because the assessee had not deducted tax at source. Therefore, the Revenue cannot raise a completely new plea at this stage regarding the allowability of expenditure.

39. We have considered rival submissions and perused the material on record. No doubt, the Assessing Officer has disallowed a part of the provision made towards sales rebate under section 40(a)(ia) of the Act by treating it as commission under section 194H of the Act. The learned Commissioner (Appeals) has also confirmed the aforesaid decision of the Assessing Officer. Therefore, the precise issue arising before us is the validity of disallowance made under section 40(a)(ia) of the Act by treating the expenditure claimed as payment towards commission. As discussed earlier, while dealing with the issue raised in other grounds which are more or less identical to the issue raised in this ground, we have held that as per the facts on record, a principal– agent relationship between the assessee and the dealers/distributors is not discernible. Therefore, the rebate/discount given cannot be treated as commission under section 194H of the Act. Our aforesaid reasoning rendered in context of ground no.2, would equally apply to this ground as well. Therefore, the disallowance made under section 40(a)(ia) deserves to be deleted. As regards the contention of the learned Departmental Representative that the provision is not allowable as expenditure, we are afraid, we cannot entertain such claim at this stage. As could be seen from the facts on record, the Assessing Officer has not raised any doubt with regard to the genuineness or allowability of expenditure. He has disallowed part of such expenditure simply for the reason that tax has not been deducted at source in terms of section 194H of the Act. Learned Commissioner (Appeals) has also approved the aforesaid decision of the Assessing Officer. Therefore, the limited issue before us is the validity of disallowance under section 40(a)(ia) of the Act. In view of the aforesaid, we decline to entertain the fresh plea of learned Departmental Representative. The decisions cited by the learned Departmental Representative being factually distinguishable would not apply to the facts of the present case. The ground raised by the assessee is allowed.

40. Ground no.7, being general in nature does not require adjudication.

41. In the result, appeal is partly allowed.

ITA no.942/Mum./2020

Assessment Year 2017–18

42. Grounds no.1 and 7, being general in nature do not require adjudication.

43. Grounds no.2 to 6 are corresponding to ground no.2 to 6, raised by the assessee in its appeal being ITA no.943/Mum./2020, decided by us in the earlier part of the order. Following our decision therein, we allow grounds no.2, 3, 4 and 6. Whereas, following our decision, therein, we dismiss ground no.5.

44. In the result, appeal is partly allowed.

45. To sum up, both the appeals are partly allowed.

Order pronounced through notice board under rule 34(4) of the Income Tax (Appellate Tribunal) Rules, 1963 on 05.10.2020