No TDS to be deducted on discount allowed and incentive given to distributors/dealers
The concept of TDS was introduced with an aim to collect tax from the very source of income. As per this concept, a person (deductor) who is liable to make payment of specified nature to any other person (deductee) shall deduct tax at source and remit the same into the account of the Central Government. The deductee from whose income tax has been deducted at source would be entitled to get credit of the amount so deducted on the basis of Form 26AS or TDS certificate issued by the deductor.
According to Section 194H of the Income Tax Act, any person, not being an individual or a Hindu undivided family, who was responsible for paying, on or after the 1st 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 5% (TDS rate under section 194H is 3.75% for transactions from 14 May 2020 until 31 March 2021):-
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 Rs 15,000
An individual or a Hindu undivided family, whose total sales, gross receipts or turnover from the business or profession carried on by him exceeds the monetary limits specified under section 44AB during the financial year immediately preceding the financial year in which such commission or brokerage is credited or paid, shall be liable to deduct income-tax under this section
For the purposes of this section:-
- “commission or brokerage” includes any payment received or receivable, directly or indirectly, by a person acting on behalf of another person for services rendered (not being professional services) or for any services in the course of buying or selling of goods or in relation to any transaction relating to any asset, valuable article or thing, not being securities;
- “professional services” means services rendered by a person in the course of carrying on a legal, medical, engineering or architectural profession or the profession of accountancy or technical consultancy or interior decoration or such other profession as is notified by the Board for the purposes of section 44AA
- “securities” shall have the meaning assigned to it in clause (h) of section 2of the Securities Contracts (Regulation) Act, 1956 (42 of 1956)
- where any income is credited to any account, whether called “Suspense account” or by any other name, in the books of account of the person liable to pay such income, such crediting shall be deemed to be credit of such income to the account of the payee and the provisions of this section shall apply accordingly.
Let us refer to the case of Tata Sky Ltd., Mumbai vs ACIT (Tds) Mumbai (2018) where the issue under consideration was whether discount allowed and incentive given by the appellant to its distributors/ dealers on sale of the products of the applicant was in the nature of Commission and the same attracted the provisions of Section 194H?
Facts of the Case and Assessment Proceedings:-
The assessee in this case is a Public Limited Company engaged in the business of Direct to Home (DTH) services in the name of Tata Sky.
The Assessing Officer (AO) held that the assessee was in default for non-deduction of tax at source on the discount and incentives allowed to the distributors/dealers on the following grounds:
- The distributor was entitled to appoint dealers within his territory and was solely responsible that they conform to rights and liabilities under the agreement.
- There were various restrictions imposed on the distributor for selling the product, its territory appointment of stockists, etc.
- The transaction clearly established the relationship of ‘principal and agent’.
- The maximum retail price (MRP) was mentioned on every product and distributors were not permitted to sell the products to the customers beyond the MRP.
- The nature of the appellant’s services was different from sale of ordinary physical goods/commodities.
- Set top boxes and the recharge coupons were only devices used for accessing or availing of the prepaid DTH services and items involved are services that included access to DTH service network. Starter kits and Recharge coupons/ vouchers were not tradable goods in the ordinary meaning of the expression “Goods” and “Sale”.
- A service can only be rendered and not sold. The distributors were acting for and on behalf of the appellant company.
- The items involved were linked to a set of services, which are identified and sold under a brand name. The distributors did not sell the prepaid vouchers as their own property but as that of the company.
- Distributorship Agreement indicated that there was a principal to Agency relationship between the appellant and the distributor as the distributors were merely conduits who facilitated the conveyance of services of the appellant company to the end user.
Reference to older cases by AO:-
The AO relied upon various decisions of the High Courts and the ITAT to observe that the decisions cited by the appellant have already been considered by these higher judicial authorities. The AO referred to the following decisions:-
- CIT Vs. Singapore Airliner & Other Airlines (Del)
- ACIT Vs. Bharati Cellular Ltd (Kolkata ITAT)
- Bharti Cellular Ltd. Vs. ACIT (Cat)
- BPL Mobile Cellular Ltd, Writ Petition No. 29202/2005 (Ker HC)
- Vodafone Essar Cellular Vs. ACIT, 332 ITR 255 (Ker)
- CIT Vs. Durga Prasad More (SC)
The AO held that the facts of the present case were identical to the facts of above cases, where the courts have held that the nature of payment by telecom operators to the distributors for recharge coupons, prepaid SIM cards etc. was on account of commission as defined u/s. 194H of the Act and hence liable to deduction of tax at source.
Hence he held that the appellant was liable to deduct tax at source in respect of payments under consideration. He therefore, treated the appellant as assessee in default as per the provisions of section 201(1) for non-deduction of tax at source in respect of the payments made to the distributors as discount/commission for sale of set top boxes, recharge coupons.
Proceedings of Commissioner of Income Tax (Appeals) [CIT(A)]
Upon the assessee’s appeal, the CIT(A) held that the discount allowed and incentive given by the appellant to its distributors/ dealers on sale of STBs and RCVs was in the nature of Commission and the same attracted the provisions of Section 194H. The appeal was therefore rejected.
Observations of ITAT pertaining to the present case
- After careful consideration ITAT noted that the assessee in this case was engaged in business of providing direct to home (DTH) services.
- The assessee entered into agreement with the distributor for sale of Set Top Box (STB) and recharge coupon vouchers.
- As per agreement, products were sold to distributor at discounted price.
- The distributor/dealer sold these items to customers/subscribers at a price not exceeding MRP on the product.
- As per the agreement payment of each order for the above items was to be made by distributor either at the time of placing the order or at the time of delivery.
- Apart from the above assessee also provided festival/seasonal discounts to the distributors. For these discounts assessee did not make any payment rather it issues credit notes and same was subsequently adjusted from the payment due from the distributor.
- The expenditure of discount was recognized in books of account. But the same was netted from sale, so in the financial statements the discount amount was not reflected.
- In this factual scenario the Assessing Officer held the assessee to be in default as per section 201(1) for non deduction of tax at source u/s 194H in respect of the discount offered to distributor and consequently making the assessee liable for interest u/s. 201(1A) of the Act.
- In the above factual background the issue was dealt with by the Assessing Officer and CIT(A). They found the assessee to be liable for deduction of tax at source.
Reference to various cases by ITAT
A reading of the case laws particularly that of the Bombay High Court in the case of Piramal Healthcare Ltd. (supra), Qatar Airways (supra) and Intervet India (P.) Ltd. (supra) showed that the assessee’s plea that the assessee should not be visited with the liability to deduct TDS for non deduction of tax at source u/s. 194H on the difference between the discounted price at which it is sold to the distributors and the MRP upto which they are permitted to sell, was a strong and sustainable view.
The Jurisdictional High Court in the case of Piramal Healthcare Ltd. (supra) and Qatar Airways (supra) has found that the difference between MRP and the price at which item was sold to the distributor cannot be held to be commission or brokerage.
Similarly in the case of Intervet India (P) Ltd (supra), the Bombay High Court held that when the assessee had introduced sales promotion scheme for distributors to boost sale of its product, when it passed on incentives to distributors/dealers/stockists through sale credit notes and claimed it. Since the relationship between assessee and distributors/stockists was that of principal to principal and the distributors were customers of assessee to whom sales were effected either directly or through consignment agent. Therefore, it cannot be treated as commission payment under section 194H.
Thus it could be held that the distributors were customers of the assessee to whom sales were affected. The discounts and credit notes credited cannot be considered to be commission payment u/s. 194H.
Similarly we note that on similar facts, the Karnataka High Court in the case of Bharti Airtel Ltd (supra) which has been duly followed by the ITAT Mumbai in Business Channels Ltd (supra) had decided the same issue in favour of the assessee.
Therefore, ITAT held that the assessee was not liable to deduct the tax at source on the impugned amounts in this case.