2015 (6) TMI 521 - AT - Income Tax

Appellate tribunal affirms CIT(A)'s decision on trade discount vs. commission classification.

The appellate tribunal upheld the CIT(A)'s decision, dismissing the appeal filed by the Revenue and the cross-objection filed by the assessee. The ... Trade discount vs commission characterization - commission liable under section 194H - tax deduction at source liability under S.201(1) and S.201(1A) - principal to principal sale and transfer of risk and rewards - application of Accounting Standard AS-9 for revenue recognition - clarificatory proviso to section 194H (Finance Act, 2007)Trade discount vs commission characterization - principal to principal sale and transfer of risk and rewards - application of Accounting Standard AS-9 for revenue recognition - commission liable under section 194H - tax deduction at source liability under S.201(1) and S.201(1A) - Whether the concession/discount given to franchisees on sale of prepaid recharge/top-up cards is a trade discount arising from principal-to-principal sales (with transfer of risk and rewards) or is in the nature of commission attracting liability to deduct tax at source under section 194H and, for failure to deduct, liability under S.201(1) and S.201(1A). - HELD THAT: - The Tribunal accepted the factual and documentary material placed by the assessee, including corporate circulars, the franchise agreement and sample invoices, and noted that consideration was collected in advance from the franchisees and that property, risk and rewards in the recharge coupons passed to the franchisees. The first appellate authority had also treated the transactions in accordance with Accounting Standard AS-9, recognising revenue net of discount as a trade discount. The Tribunal found these factual features determinative and held that the concession could not be re-characterised as commission. It further observed that the clarificatory proviso to section 194H (inserted by Finance Act, 2007) and the special position of the public sector undertaking were relevant, and that earlier High Court and tribunal decisions were considered and distinguished on facts. Since the CIT(A)'s view was based on the case's factual matrix and consistent accounting treatment, the Tribunal found no reason to interfere with the conclusion that the payments were trade discounts and not commission liable to TDS under section 194H, and hence the demand under S.201(1) and S.201(1A) did not stand. [Paras 9, 10]Concession to franchisees is trade discount arising from principal-to-principal sales with transfer of risk and rewards; not commission attracting TDS under section 194H, and demand under S.201(1) and S.201(1A) is not warranted.Tax deduction at source liability under S.201(1) and S.201(1A) - clarificatory proviso to section 194H (Finance Act, 2007) - Whether the Revenue's appeal against the CIT(A)'s order should be allowed and whether the assessee's cross-objection supporting the CIT(A) should succeed. - HELD THAT: - Having upheld the factual and accounting basis for treating the differential as trade discount and having found no mischaracterisation as commission, the Tribunal held that the CIT(A)'s order did not call for interference. The cross-objection filed by the assessee in support of the CIT(A)'s order was held to be infructuous in view of the dismissal of the Revenue's appeal. [Paras 11, 12]Revenue's appeal dismissed; assessee's cross-objection dismissed as infructuous.Final Conclusion: On the facts and accounting treatment, the concession to franchisees was held to be a trade discount in the context of principal-to-principal sales and not commission subject to TDS; Revenue's appeal was dismissed and the assessee's cross-objection was dismissed as infructuous. Issues:1. Interpretation of the nature of transactions with franchisees for sale of recharge/top up cards.2. Determination of whether the discount provided to franchisees is trade discount or commission.3. Applicability of TDS provisions under Section 194H on the discount provided.4. Consideration of the circulars issued by the corporate office of BSNL in determining the nature of transactions.5. Assessment of the relationship between BSNL and franchisees as principal to principal or principal to agent.6. Evaluation of the method of accounting followed by the assessee in recognizing revenue from the sale of prepaid recharge coupons.Analysis:1. The appeal and cross-objection in the case revolved around the nature of transactions with franchisees for selling recharge/top up cards. The Revenue contended that the transactions were not sales of goods, while the assessee argued that the transactions were on a principal to principal basis, with the discount provided considered as trade discount.2. The main issue was whether the discount given to franchisees should be treated as trade discount or commission. The Revenue argued that it should be considered as commission under Section 194H, while the assessee maintained that it was a trade discount. The CIT(A) concluded that the discount was a trade discount based on the method of accounting followed by the assessee.3. The applicability of TDS provisions under Section 194H on the discount provided to franchisees was also discussed. The CIT(A) considered the circulars issued by the corporate office of BSNL and the method of accounting followed by the assessee to determine that the discount was indeed a trade discount.4. The circulars issued by the corporate office of BSNL played a significant role in determining the nature of transactions. The CIT(A) relied on these circulars to support the conclusion that the discount provided to franchisees was a trade discount.5. The assessment of the relationship between BSNL and franchisees as principal to principal or principal to agent was crucial in determining the nature of the transactions. The CIT(A) concluded that the transactions were on a principal to principal basis, with the discount considered as a trade discount.6. Lastly, the method of accounting followed by the assessee in recognizing revenue from the sale of prepaid recharge coupons was examined. The CIT(A) found that the assessee had followed a systematic method of accounting as per AS-9, leading to the discount being treated as a trade discount. The appellate tribunal upheld the CIT(A)'s decision, dismissing the appeal filed by the Revenue and the cross-objection filed by the assessee.