Distributor discount treated as commission under Section 194H where contractual terms showed a principal-agent arrangement.

Discount retained by prepaid distributors was treated as commission or brokerage under Section 194H because the contractual terms showed an agency arrangement: distributors paid in advance, received stock at a fixed transfer price, could resell at their own price, and were required to return unsold stock on termination. The Court held that Section 194H is not limited to commission paid separately in cash or cheque; it also covers amounts received or receivable by a person acting on behalf of another. On that footing, the distributors were acting as links in service delivery on behalf of the assessee, so tax deduction at source was required and the assessee was liable as an assessee in default under Sections 201(1) and 201(1A).

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Issues: Whether the discount allowed to prepaid distributors was commission or brokerage within Section 194H of the Income-tax Act, 1961, so as to require deduction of tax at source, and whether the relationship between the assessee and the distributors was one of principal and agent or principal to principal.

Analysis: The Court compared the agreement governing the distributors with the legal tests of sale and agency. It held that the decisive question was the true nature of the arrangement, to be gathered from the contractual terms and the actual incidents of the transaction. The agreement showed advance payment by the distributors, a fixed transfer price from the assessee, freedom for the distributors to resell at their own price, and a requirement to return unsold stock on termination, which were inconsistent with a pure sale transaction in the ordinary sense. The Court further held that Section 194H was not confined to cases where commission is separately paid in cash or cheque, because the statutory definition includes payments received or receivable by a person acting on behalf of another. The Court also distinguished the distributor arrangement from a principal to principal sale, and concluded that the distributors were performing functions in the chain of service delivery on behalf of the assessee.

Conclusion: The arrangement was held to be one of principal and agent, the discount constituted commission or brokerage within Section 194H, and tax deduction at source was required. The assessee was rightly treated as an assessee in default under Sections 201(1) and 201(1A).

Ratio Decidendi: Where a distributor acts as a link in the delivery of services and the contractual incidents show that it operates on behalf of the service provider, the margin retained by the distributor is commission or brokerage under Section 194H and attracts deduction of tax at source.

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