2017 (9) TMI 105 - AT - Income Tax

Retailer discounts not commission under Section 194H; Disallowance under Section 40(a)(ia) overturned.

The Tribunal held that the discount given to retailers was not considered as commission under Section 194H and that the disallowance under Section ... TDS u/s 194H - assessee sold RTL products to the end users through retailers at a discounted price on the MRP - disallowance u/s 40(a)(ia) - AO treated the discount allowed to the retailers as commission - Held that:- The assessee i.e. the distributor M/s. Dhruba Communication, records the sales to the retailers at a discounted rate which is below the MRP. This is the rate at which the sale is made. There is no payment of the differences between discounted rate and the MRP by the retailer to the distributor or vice versa. This quantum of discount from the MRP has never been claimed as expenditure by the assessee in its books of account. Under these circumstances, we are of the considered opinion that no disallowance can be made under section 40(a)(ia). When nothing is claimed as a deduction under sections 30 to 38 of the Act or in the computation of income no disallowance can be made under section 40(a)(ia) of the Act. In the instant case, the impugned amount of discount of ₹ 71,42,777 over the gross value of RTL products sold/supplied by the assessee to the 110 retailers has not been claimed as deduction by the assessee under sections 30 to 38 of the Act. Hence, the question of making any disallowance or adding back of the said discount to the income of the assessee under section 40(a)(ia) of the Act does not arise. - Decided in favour of assessee. Issues Involved:1. Whether the discount allowed by the assessee to retailers constitutes 'commission' under Section 194H of the Income-tax Act, 1961.2. Whether the disallowance under Section 40(a)(ia) of the Income-tax Act, 1961, is applicable when the discount is not claimed as an expenditure.Issue-wise Detailed Analysis:1. Whether the discount allowed by the assessee to retailers constitutes 'commission' under Section 194H of the Income-tax Act, 1961:The Assessing Officer (AO) treated the discount allowed to retailers as commission, relying on the decision of the Calcutta High Court in the case of Bharti Cellular Ltd. v. Asst. CIT [2013] 354 ITR 507 (Cal). The AO argued that the assessee acted on behalf of Reliance Telecom Limited (RTL) as a service provider, and thus, the discount was actually a commission for services rendered. Consequently, the AO disallowed the amount under Section 40(a)(ia) of the Income-tax Act, 1961, as no tax was deducted at source in terms of Section 194H.The first appellate authority upheld the AO's decision, relying on the same Calcutta High Court judgment. However, the assessee contended that the relationship between the assessee and the retailers was that of a principal to principal basis, and the discount was a reduction in sale price, not commission. The assessee argued that the retailers were not commission agents but purchasers of RTL products, and the sale to retailers was at a rate below the MRP fixed by RTL.The Tribunal noted that the jurisdictional High Court in Bharti Cellular Ltd. dealt with the relationship between the seller company and the franchisee/distributor, not between the distributor and the retailer. The Tribunal found that the facts of the case were different, and thus, the judgment was not applicable. The Tribunal concluded that the discount given by the assessee to the retailers was not commission within the meaning of Section 194H, as there was no principal-agent relationship between the assessee and the retailers.2. Whether the disallowance under Section 40(a)(ia) of the Income-tax Act, 1961, is applicable when the discount is not claimed as an expenditure:The Tribunal examined whether the disallowance under Section 40(a)(ia) was applicable when the discount was not claimed as an expenditure. The Tribunal noted that for invoking Section 40(a)(ia), the following cumulative conditions must be satisfied:(i) The impugned amount should be of the nature of interest, commission or brokerage, rent, royalty, fees for professional services, or amounts payable to a contractor or sub-contractor.(ii) The assessee should be liable under Chapter XVII-B for deduction of tax at source on such amounts.(iii) The assessee should have failed to deduct tax at source or failed to pay it on or before the due date specified under Section 139(1).The Tribunal observed that the discount given by the assessee was not claimed as an expenditure in the books of account or in the computation of income. Therefore, the question of disallowance under Section 40(a)(ia) did not arise, as the discount was not claimed as a deduction under Sections 30 to 38 of the Act.Conclusion:The Tribunal concluded that the discount given by the assessee to the retailers was not commission within the meaning of Section 194H and that the disallowance under Section 40(a)(ia) was not applicable since the discount was not claimed as an expenditure. Consequently, the disallowance made by the AO was deleted, and the appeal of the assessee was allowed.