No TDS on distributor commissions in principal-to-principal relationships

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Case Name:

Commissioner of Income Tax vs. Idea Cellular Ltd.(High Court of Rajasthan)

D.B. Income Tax Appeal No. 92/2018

Key Takeaways:

1. TDS under Section 194H is not applicable when the relationship between a company and its distributor is on a principal-to-principal basis.

2. For Section 194H to apply, there must be an actual payment made by the assessee to a third party.

3. The court emphasized the importance of examining the specific agreement between parties to determine their relationship.

Issue:

Was Idea Cellular Ltd. liable to deduct TDS under Section 194H of the Income Tax Act on commission payments to its distributors?

Facts:

- The case originated from an appeal by the Commissioner of Income Tax against a Tribunal decision favoring Idea Cellular Ltd.

- The dispute centered on whether Idea Cellular was required to deduct TDS on commissions to distributors.

- The relationship between Idea Cellular and its distributors was a key point of contention.

- The case referenced a previous decision in D.B. Income Tax Appeal No. 96/2016, which dealt with similar issues.

Arguments:

The Commissioner of Income Tax argued:

1. The Tribunal erred in holding that Idea Cellular wasn't liable to deduct TDS under Section 194H.

2. The relationship between Idea Cellular and its distributors was that of principal and agent.

3. The Tribunal was wrong in deleting the demand under Section 201(1) for non-deduction of TDS.

Idea Cellular likely argued (based on the court's decision):

1. Their relationship with distributors was on a principal-to-principal basis, not agency.

2. No actual payment of commission was made to distributors.

3. Section 194H doesn't apply in their case.

Key Legal Precedents:

1. D.B. Income Tax Appeal No. 96/2016 in Commissioner of Income Tax (TDS), Jaipur Vs. M/s. Idea Cellular Ltd. (Formerly Known As Idea Telecommunication Ltd.)

2. S.A. Builders Vs. Commissioner of Income Tax- (2007) 288 ITR 1 (SC)

3. CIT Vs. Eli Lilly & Co. (India) P. Ltd.

Judgement:

The High Court dismissed the appeal, ruling in favor of Idea Cellular Ltd.

Key points of the judgment include:

1. Section 194H presupposes an actual payment made by the assessee to a third party.

2. The relationship between Idea Cellular and its distributors was on a principal-to-principal basis, not agency.

3. No actual payment of commission was made; instead, the amount received was reduced.

4. The court found that the provisions of Section 194H were wrongly invoked in this case.

FAQs:

Q1: What is Section 194H of the Income Tax Act?

A1: Section 194H deals with TDS on commission or brokerage payments.

Q2: Why wasn't Idea Cellular required to deduct TDS in this case?

A2: The court found that their relationship with distributors was principal-to-principal, not agency, and no actual commission payment was made.

Q3: What's the significance of a "principal-to-principal" relationship in this context?

A3: In a principal-to-principal relationship, both parties act independently, unlike in an agency relationship. This distinction affects tax obligations.

Q4: Does this judgment apply to all companies with distributors?

A4: Not necessarily. The court emphasized examining specific agreements between parties to determine their relationship and subsequent tax obligations.

Q5: What's the key condition for Section 194H to apply?

A5: There must be an actual payment made by the assessee to a third party for Section 194H to be applicable.

1. By way of this appeal, the appellant has challenged the judgment and order of the Tribunal whereby the Tribunal has dismissed the appeal of Revenue and allowed the appeal of assessee.

2. Counsel for the appellant has framed the following questions of law:-

“Whether in the facts and circumstances of the case, the Tribunal was justified in holding that whether the assessee is liable to deduct TDS u/s. 194H of the IT Act, as the relation between assessee and distributor is that of principal to agent.

Whether in the facts and circumstances of the case, the Tribunal has erred in law in deleting the demand u/s. 201(1) for non deduction of TDS u/s 194 H on commission payment to various distributors.”

3. Now, the issue is covered by the decision of this Court in D.B. Income Tax Appeal No. 96/2016 in Commissioner of Income Tax (TDS), Jaipur Vs. M/s. Idea Cellular Ltd. (Formerly Known As Idea Telecommunication Ltd.), and other connected matters, decided on 11.07.2017, wherein it has been held as under:-

“44. Now, the first question which has come up for our consideration is, ‘whether in the facts and circumstances of the case the learned Tribunal was right and justified in holding that assessee was liable to withhold tax at source under S. 194H of the Income Tax Act, 1961 amounting to Rs.19,74,842/- (including interest) in respect of sales to its distributors, which are on principal to principal basis and wherein property in the goods is transferred to the distributor’.

45. Taking into account the provisions of Section 182 of the Contract Act and the arrangement which has been entered into between the company and the distributor and taking into account the provisions of Section 194H, the Tribunal while considering the evidence on record, in our considered opinion, has misdirected itself in considering the case from an angle other than the angle which was required to be considered by the Tribunal under the Income Tax Act. The Tribunal has travelled beyond the provisions of Section 194H where the condition precedent is that the payment is to be made by the assessee and thereafter he is to make payment. In spite of our specific query to the counsel for the department, it was not pointed out that any amount was paid by the assessee company. It was only the arrangement by which the amount which was to be received was reduced and no amount was paid as commission.

46. In that view of the matter, if we look at the provisions of Section 194H and even if explanation is taken into consideration, there is no occasion of invoking provisions of Section 194H, since the amount is not paid by the assessee.

47. Taking into account the conclusion which has been arrived at by the Tribunal is misdirected in view of the arrangement which has been arrived at between the company and the Distributor. Assuming without admitting, if the contention which has been raised before the Tribunal is accepted, the same can be at the most expenses which are not allowable under the Income Tax Act, if at all claimed without proper basis but to conclude that they are covered under Section 194H and the income tax or the TDS is required to be deducted is not correct and accordingly disallowance on that basis is not correct. In our considered opinion, from which amount of tax is to be deducted is a doubtful proposition inasmuch as the Management Information System which has been sought to be relied upon for alleging that expenditure has been claimed could not have been relied upon by the Tribunal or the authorities under the Income Tax Act.

(i) The findings which are given by the Tribunal regarding Distributor being Agent in view of the discussion made here-in-above, the arrangement which has been made between the Company and the Distributor is on Principal to Principal basis and the responsibility is on the basis of agreement entered into between the parties.

(ii) Regarding MRP, the findings which are arrived at is a price which has been fixed by the assessee company and other expenses, namely; commission given to the retailer and everything is to be managed by the Distributor. In that view of the matter, the restrictions which are put forward will not decide the relation-ship of Principal and Agent.

(iii) The Distributor has all rights to reduce his margin. He can increase the margin of retailer and will reduce the margin from 10% to anything between 1% to 10%. There is no restriction by the assessee to give commission amount to the retailer.

(iv) Regarding area of operation, it is the business policy of the assessee to give Distributor-ship for a particular area. Only on that basis, it will be erroneous to held that it is on Principal to Principal basis. For deciding the relation-ship on Principal to Principal basis, the criteria will not be of area of operation but agreement entered into between the parties.

(v) Regarding the change in price it is always between the assessee or the company and the Distributor to decide who will absorb the loss. In that view of the matter, the findings arrived at by the Tribunal is erroneous.

(vi) Regarding the return of goods after expiry date, it is always the understanding between the manufacturer and company that the product is not for preparation or consumed before expiry date, the consumed items cannot be allowed otherwise manufacturer will invite criminal liability. To avoid any criminal liability or any criminal act is done for taking back the goods, will not deter the relation-ship of Principal to Principal basis.

(vii) Regarding supervision, it is always for the manufacturer and the company to look into the matter that his Distributor or Sub-Distributor or Retailer will not induct in mal practice.

(viii) Regarding goods sold to the Distributor, it is always a matter of contract how further goods will be distributed. Restriction on sub- distributor will not change the transaction from Principal to Principal.

(ix) Regarding expenses which are described by the Tribunal and one of the reason is that it is always for the assessee to allow any special allowance or expenses to promote the sale. In a competitive world to promote the sale, if the Distributor is not given any encouragement, the business will not grow.

In that view of the matter, in view of the observations of the Supreme Court, the Income Tax Officer cannot enter into the shoes of the assessee. (S.A. Builders Vs. Commissioner of Income Tax- (2007) 288 ITR 1 (SC).

(x) Regarding providing a vehicle it was very clear that by providing vehicle and getting list of expenses will not decide the relation-ship of Principal and Agent.

48. In our considered opinion, Section 194H pre-supposes the payment to be made to the third party namely, Distributor or the Agency and if on a close scrutiny of Section 182, Distributor is not an agent, therefore, in our considered opinion, the provisions of Section 194H have wrongly been invoked, and therefore, the first issue is answered in favour of assessee and against the Department.

49. The second issue which has been raised for our consideration, as discussed hereinabove, the Management Information System was not a part of their books of accounts nor could have been relied upon by the Income Tax Authorities. The basis on which the proceedings were initiated, in our considered opinion, the Statutory Audit Report is final conclusion over the authorities under the Income Tax Act, therefore, the second issue is required to be answered in favour of the assessee.

50. Regarding third issue whether 201A or 201(1A), in view of the decisions of different High Courts, the argument canvassed by counsel for the appellant pre-supposes deduction out of the payment. In our conclusion in issue No.1, the amount was not required to be deducted since they have not made any payment. In that view of the matter any proceedings under Section 201 or 201(1A) are misconceived. In that view of the matter, this issue is also answered in favour of assessee.

51. Contention regarding provisions of Section 271 of the Act,in view of our answer in favour of assessee, this issue is also required to be answered in favour of assessee. Even otherwise as rightly held by the Supreme Court in CIT Vs. Eli Lilly & Co. (India) P. Ltd.(supra), the penalty could not have been levied in all the appeals filed by assessee Coca Cola. M/s Bharti Hexacom Ltd.

52. Regarding the other appeals of Cellular Companies the questions are required to be answered as discussed hereinabove. The relationship is not of agent. It is principal to principal basis. The payment is received by the company and the amount of commission is never paid to the agent or the Distributor. Therefore, no TDS is required to be deducted. We also accept the contention raised by Mr. Jhanwar that even otherwise in view of divergent judicial views, one in favour of the assessee is required to be adopted as per settled law. Taking into consideration the above conclusion, the first issue is required to be answered in favour of assessee.

53. Regarding Section 194J of the Act, in view of the Kerala High Court decisions, the issue is answered in favour of assessee and third issue even as per the statutory definition, there is no service and Sections 201 and 194H would not apply in view of the agreement as referred hereinabove.

Tata Teleservices

54. In view of agreement the issue regarding 194H and 194J as held in other cases, both the issues are answered in favour of the assessee. Vodafone

55. Issues regarding Sections 194H, 194J and 201 of the Act, they are answered in favour of assessee.

56. Additional questions are framed in the case of Department. There are 5 issues in favour of assessee (issue Nos. 1 and 2 are wrongly framed by the Court). However, in view of our above discussion, they are required to be answered in favour of the assessee.

57. In case of appeal preferred by the assessee, issue No.4 is required to be answered in favour of assessee that the CIT (A) has all jurisdiction to restore or set aside the judgment of AO since it is a statutory appeal, the appellate court has all powers to deal with the same. All other issues are answered in favour of the assessee. Idea Cellular

58. As the agreement is produced, issues are answered in favour of assessee in the departmental appeals.

59. Even the contention which has been raised by the counsel for the assessee that the final tax is paid by the Distributor and not by the agent, the revenue is not at loss in any form.”

4. Hence no substantial question of law arises. The appeal stands dismissed.

(VIJAY KUMAR VYAS),J (K.S.JHAVERI),J