TDS Section 194H – Whether on Payment of Commission or on Discount Given? Open Issue for more than 15 years?

TDS Section 194H – Whether on Payment of Commission or on Discount Given? Open Issue for more than 15 years.

Dear Friends and Professional Colleagues, recently have read one cases law on Income Tax TDS provision, after reading the case surprised to notice, there is no clarification on this matter for more than 15 years. Tribunal is referring its own case passed back in 2006-17 and relying on the same and passing the order in the year 2016. Aggrieved by the order, department has gone to High Court and again filed SLP to Supreme Court, but still matter is not resolved. Supreme Court has issued notice in SLP filed by department which means still case is open and facts has to be studied again by Tribunal.

Below given the details of the case and extract of some orders for your understanding and some questions which arose in my mind, and urged me to write this article. Contents tried to keep in simpler form for better understanding.

Parties Involved:

Commissioner of Income Tax, TDS -2 …………. Appellant

Super Religare Laboratories Ltd. ……………….. Respondent

Timelines: 

1. The ITAT has relied upon respondent’s own case for Assessment Year 2006-2007

2. Appellant is impugning an order dated 30th September 2016 passed by the Income-tax Appellate Tribunal (ITAT) and went to High Court.

3. Appellant has filed Special Leave Petition (SLP) to issue notice against the impugned order passed by High court favouring assesse.

4. Supreme Court has issued Notice on May 20, 2022 in Special Leave Petition filed by Commissioner of Income Tax, TDS -2

Legal Terms simple meaning:

Impugned Order: An impugned order is an order which has been challenged. If an order is not final it is not an impugned order unless it is challenged. An interim order is an order passed partially before a final order is passed in the entire matter.

Special Leave Petition (SLP):  The Constitution of India under Article 136 vests the Supreme Court of India with a special power to grant special leave to appeal against any judgment or order or decree in any matter or cause passed or made by any Court/tribunal in the territory of India.

Point for Discussion (Matter):

Supreme Court has issued Notice on May 20,2022 in Special Leave Petition filed by Commissioner of Income Tax, TDS -2 against order of High Court that where assessee-company engaged in providing laboratory and testing services to customers through third party collection centres had allowed certain discount to such collection centres, since assessee did not perform any act of paying but was only receiving payments from these collection centres, there was no obligation on assessee to deduct tax at source under section 194H on discount so allowed.

Implication:

Supreme Court has set aside the impugned order passed by High Court which favoured the order of ITAT. This means matter is not settled yet, ITAT has to study the case in detail and pass the order deciding whether TDS is applicable in this case or not?

Extract from ITAT Order:

1. Respondent is engaged in providing laboratory and testing services to customers through its own and through third party collection centres. Respondent allowed discounts to the collection centres other than its own centres. For example, collection centres would charge a patient Rs. 500 for a particular blood test and hand over the sample drawn to respondent and respondent would charge the collection centre Rs. 400. The difference of Rs. 100, according to appellant, is commission to paid to collection centres and respondent had an obligation under section 194H of the Income-tax Act, 1961 (the IT Act) to deduct TDS. According to appellant, as respondent failed to deduct such TDS, respondent was a defaulter and Assessing Officer passed an order under section 201(1) and 201(1A) of the IT Act.
2. Respondent challenged that order before Commissioner of Income-tax (Appeals) [CIT(A)] who allowed the appeal. Against that order, appellant preferred an appeal before Income-tax Appellate Tribunal (ITAT) and ITAT confirmed the order of CIT (A). The ITAT has relied upon respondent’s own case for Assessment Year 2006-2007 wherein it has held that discount allowed by respondent to the collection centres is not commission and not attracted by the provisions of section 194H for the reason that there is no principal agent relationship between respondent and the collection centre and the relationship between respondent and collection centres is only principal to principal relationship and therefore, provisions of section 194H have no application.
3. Under section 194H, the obligations is on any person who is responsible for paying any income by way of commission or brokerage to deduct tax at source at the time of credit of such income to the account of the payee or at the time of payment of such income in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier.
4. In this case, admittedly, respondent has not been paying any money to the collection centres. Respondent was only receiving payment from the collection centres. As noted earlier, the collection centres collect money from the patient and pays a reduced amount to respondent and keeps the difference for itself as its margin.
5. As the section is applicable only to a person who is responsible for paying to deduct tax at the time of credit to the account of the payee or at the time of payment and as respondent does not perform any act of paying, there is no obligation on the company to deduct tax at source.
6. We fail to understand appellant’s arguments as to how respondent was to deduct TDS when it was not making any payment. Mr. Suresh Kumar (case represented by) was unable to explain how respondent should have deducted TDS and paid with the treasury when respondent was not making any payment. Even the Assessing Officer, who the appellant wishes to support, does not say anything on this. The Assessing Officer’s order is contrary to sense.
7. In our view, ITAT (though has applied slightly different preposition while allowing the appeal) has not committed any perversity or applied incorrect principles to the given facts and when the facts and circumstances are properly analysed and correct test is applied to decide the issue at hand, then, we do not think that question as pressed raises any substantial question of law.
8. Both appeals are devoid of merit and are dismissed with no order as to costs. [Passed In favour of assessee]

Extract of High Court Order:

1. Appellant is impugning an order dated 30th September 2016 passed by the Income-tax Appellate Tribunal (ITAT) and the substantial questions of law proposed are as under :

“(a) Whether on the facts and in the circumstances of the case and in law, the Hon’ble ITAT was justified in holding that the relationship between the assessee and collection centres is in the nature of Principal to Principal and not that of Principal to Agent and that the assessee company was not liable to deduct TDS u/s. 194H of the I.T. Act?

(b) Whether on the facts and in the circumstances of the case and in law, the Hon’ble ITAT was justified in not appreciating that all the collection centres are working as agents of the assessee company on the basis of commission only and hence the discounts given to collection centres were in the nature of “commission” within the meaning of sec. 194H of the Act?”

Section 194H of the Income-tax Act, 1961 – Deduction of tax at source – Commissions, brokerages etc. (Collection centres, discount allowed to) – Assessee-company was engaged in providing laboratory and testing services to customers through its own and through third party collection centres – It allowed certain discount to these collection centres – Assessing Officer held that such discount allowed by assessee to collection centres was in nature of commission and assessee was obligated under section 194H to deduct tax at source on same – It was noted that provision of section 194H to deduct tax was applicable only to a person who was responsible for paying, at time of credit to account of payee or at time of payment – Whether, since assessee did not perform any act of paying but was only receiving payments from these collection centres, there was no obligation on assessee-company to deduct tax at source under section 194H on discount so allowed – Held, yes [Para 7] [Passed In favour of assessee]

Extract of Supreme Court Notice:

Section 194H of the Income-tax Act, 1961 – Deduction of tax at source – Commissions, brokerages etc. (Collection centres, discount allowed to) – Assessee-company was engaged in providing laboratory and testing services to customers through third party collection centres – It allowed certain discount to these collection centres – Assessing Officer held that such discount allowed by assessee to collection centres was in nature of commission and assessee was obligated under section 194H to deduct tax at source on same – It was noted that provision of section 194H to deduct tax was applicable only to a person who was responsible for paying, at time of credit to account of payee or at time of payment – High Court by impugned order held that since collection centre collected money from patients and paid a reduced amount to assessee and kept difference for itself as margin/discount, assessee did not perform any act of paying but was only receiving payments from these collection centres and, thus, there was no obligation on assessee-company to deduct tax at source under section 194H on discount so allowed – Whether notice was to be issued in SLP filed by revenue against impugned order of High Court – Held, yes [Para 1] [Passed In favour of revenue]

Section Analysis:

Section 194H of the Act reads as under :

194H. Commission or brokerage.—Any person, not being an individual or a Hindu undivided family, who is responsible for paying, on or after the 1st day of June, 2001, to a resident, any income by way of commission (not being insurance commission referred to in section 194D) or brokerage, shall, at the time of credit of such income to the account of the payee or at the time of payment of such income in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier, deduct income tax thereon at the rate of [five] per cent :

Provided that no deduction shall be made under this section in a case where the amount of such income or, as the case may be, the aggregate of the amounts of such income credited or paid or likely to be credited or paid during the financial year to the account of, or to, the payee, does not exceed [fifteen thousand rupees].

Questionnaire:

1. Whether collection centre retaining INR 100/- out of INR 500/- [Figures as per the example given in ITAT extract] cannot be considered as Income for providing the services wherein given of discount and falls in the point “at the time of credit of such income to the account of the payee”?
2. ITAT is relying on the order passed in 2006 – 07 for same company case? Why there is no clarification circular issued by IT department on this matter?
3. If case goes in favour of assesse, then similar transaction in other industry like in airline where agents collect and give the amount to airline industry after retaining its commission, there will TDS will get applicable?
4. How the TDS treatment would have been accounted (this transaction would be normal course of business) in this company, for all this years when the matter is not settled for so many years?
5. Why so long this cases to be stretched in Tribunals, Courts? Like here, after 2016 order of Tribunal, case has been heard in High Court in 2021.

Case Reference:

1. [2022] 139 taxmann.com 369 (SC)
2. Notice issued in SLP against CIT v. Super Religare Laboratories Ltd. [2021] 133 taxmann.com 313/[2022] 284 Taxman 657 (Bom.)
3. [2021] 133 taxmann.com 313 (Bombay)/[2022] 284 Taxman 657 (Bombay)[21-10-2021]

Disclaimer: The Contents of the document are solely for information purpose. It does not constitute professional advice or a formal recommendation. Due care has been taken in preparing this document, the existence of mistakes and omissions herein is not ruled out and does not intent to hurt anyone. Comments on misinterpretation and mistakes are wholeheartedly invited.

Author – CA Chelladurai M., a practicing Chartered Accountant from Thane, Mumbai and can be reached at Email: [email protected] and Phone : 9892697493

CA Chelladurai M., has more than 10 years of professional experience in taxation, auditing, accounting and consulting profession.