2006 (1) TMI 454 - AT - Income Tax

Tribunal rules in favor of assessee: Advertising agencies not agents, trade discount not commission

All India Radio Commercial Broadcasting Service/ Prasar Bharti Broadcasting Corpn. of India Versus Income-tax Officer, Ward 49(1), New Delhi

All India Radio Commercial Broadcasting Service/ Prasar Bharti Broadcasting Corpn. of India Versus Income-tax Officer, Ward 49(1), New Delhi - [2006] 8 ... Issues Involved:1. Whether the advertising agencies are the agents of the assessee and whether there is a principal-agent relationship between the assessee and the advertising agencies.2. Whether the amount of 15% retained by the advertising agency constituted commission within the meaning of section 194H.3. Whether the assessee was liable to deduct TDS on the amount deducted by the advertising agencies while making payment to the assessee.Issue-wise Detailed Analysis:1. Principal-Agent Relationship:The primary issue was to determine if the advertising agencies acted as agents of the assessee, establishing a principal-agent relationship. The tribunal examined the nature of the contract under the relevant provisions of the Contract Act and Sales of Goods Act. It was noted that the formal agreements between the advertising agency and the assessee were not produced. However, based on the sample agreements and the terms and conditions provided, it was concluded that the contract was between the assessee and the advertiser, not the advertising agency. The advertising agencies were found to be acting on behalf of the advertiser, not as agents of the assessee. The tribunal cited several cases, including Bhopal Sugar Industries Ltd. v. STO and Heros Publicity Services, to support the conclusion that the relationship was one of principal to principal, not principal to agent.2. Nature of the Amount Retained:The tribunal then considered whether the 15% retained by the advertising agencies constituted commission under section 194H. It was determined that the amount deducted by the agency from the payment received from the advertiser could not be treated as a commission paid by the assessee. Instead, it was considered a trade discount or commission paid by the advertiser for services rendered by the advertising agency to the advertiser. The tribunal referenced the case of Ahmedabad Stamp Vendors Association v. UOI, which clarified that such transactions do not fall under the purview of section 194H.3. Liability to Deduct TDS:Given the findings on the first two issues, the tribunal concluded that the assessee was not liable to deduct TDS on the payments received by the advertising agencies. The tribunal also referred to CBDT Circular No. 715, which clarified that TDS provisions would apply when a client makes a payment to an advertising agency, not when an advertising agency makes a payment to the media. This supported the conclusion that the assessee was not responsible for deducting TDS under section 194H.Bona Fide Belief:The tribunal also addressed the assessee's plea of bona fide belief, which was based on the understanding that the amount was not directly paid by the assessee and that the relationship was not one of principal and agent. The tribunal found that the assessee had sufficient basis for this belief, supported by CBDT circulars and relevant case law. Consequently, the tribunal held that no demand could be raised against the assessee under section 201(1A) on the grounds of bona fide belief.Conclusion:The tribunal set aside the orders of the learned CIT(A) and allowed the appeals of the assessee, concluding that the assessee was not liable to deduct TDS under section 194H and that the demand raised under section 201 was not legally justified.