Non-resident company's payments for student referrals disallowed under Income Tax Act.

The Tribunal held that the payments made by the non-resident company to schools for referring students to purchase textbooks constituted 'commission or brokerage' under Section 194H of the Income Tax Act. Consequently, 30% of the expenditure was disallowed under Section 40(a)(ia) for failure to deduct tax at source. The Tribunal directed the Assessing Officer to verify if the recipients had disclosed the receipts in their income tax returns, and if so, to delete the disallowance. The appeal was partly allowed for statistical purposes, subject to verification of recipient disclosures.

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Issues Involved:
1. Whether the payments made by the assessee towards school support services fall within the ambit of 'commission or brokerage' under Section 194H of the Income Tax Act.
2. Whether the assessee is liable for disallowance under Section 40(a)(ia) of the Income Tax Act for failure to deduct tax at source on these payments.

Detailed Analysis:

Issue 1: Classification of Payments under Section 194H

Background:
The assessee, a non-resident company and a branch of Oxford University Press, UK, engaged in publishing and selling educational books, made payments termed as "School Support Payments" to various schools. These payments were claimed as sales promotion expenses in the return of income. The Assessing Officer (AO) classified these payments as 'commission or brokerage' under Section 194H, necessitating tax deduction at source.

Assessee's Argument:
The assessee contended that:
- The payments were made to incentivize schools for educational purposes.
- There was no principal-agent relationship between the assessee and the schools.
- The payments were not commissions but business expenditures to promote sales.
- The provisions of Section 40(a)(ia) would not apply as there was no requirement to deduct tax at source.

Assessing Officer's Conclusion:
The AO concluded that:
- The payments were made to schools for referring students to buy textbooks from authorized booksellers.
- These payments were essentially sales commissions based on the number of books sold, thus falling under 'commission or brokerage' as per Section 194H.
- Consequently, the AO disallowed 30% of the expenditure under Section 40(a)(ia) due to non-deduction of tax at source.

Tribunal's Findings:
The Tribunal held that:
- The payments were made for services rendered by schools in referring students to purchase the assessee's textbooks, enhancing the assessee's business profitability.
- The substance of the transaction indicated that the payments constituted 'commission or brokerage' under Section 194H.
- The case law cited by the assessee (CIT vs Intas Pharmaceuticals Ltd) was factually distinguishable and not applicable.

Issue 2: Disallowance under Section 40(a)(ia)

Assessee's Argument:
On a without prejudice basis, the assessee argued that:
- As per the second proviso to Section 40(a)(ia), if the recipients (schools/societies/trusts) had disclosed the receipts in their income tax returns, no disallowance should be made in the hands of the payer.

Tribunal's Direction:
The Tribunal directed:
- The AO to verify whether the recipients had disclosed the receipts in their returns of income.
- If verified, the disallowance under Section 40(a)(ia) should be deleted, even if the recipients' income was exempt under the Act.
- The assessee to furnish necessary details for verification.

Conclusion:
The Tribunal partly allowed the appeal for statistical purposes, directing the AO to verify the disclosure of receipts by the recipients and to delete the disallowance if the conditions of the second proviso to Section 40(a)(ia) were met.

Order:
The appeal of the assessee is partly allowed for statistical purposes. The order was pronounced on 13/12/2022.

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