2023 (2) TMI 190 - AT - Income Tax

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

Oxford University Press Versus DCIT, International Taxation, Circle-3 (2) (2), Mumbai

The Tribunal held that the payments made by the non-resident company to schools for referring students to purchase textbooks constituted 'commission or ... TDS u/s 194H - commission or brokerage - referring the students to the booksellers to purchase the textbooks published by the assessee - support services - Whether recipients had disclosed the receipts from the assessee in their returns of income? - HELD THAT:- The assessee had made payment of School support services to various schools / societies for the services rendered by them to the assessee by way of referring the students to the booksellers to purchase the textbooks published by the assessee. For the reference made by the schools to the students, it would not be possible for the booksellers to sell the textbooks published by the assessee. Hence but for this reference from the schools, the assessee’s profitability could not have been enhanced. Hence we hold that the payment of school support services is an expenditure wholly and exclusively incurred for the purpose of business of the assessee. The substance of the transaction is to be given more importance than its form. The Character of payment is to be analysed. On analyzing the same, the only logical conclusion that could be drawn is that the payments made by the assessee squarely falls under the ambit of ‘commission or brokerage’ in terms of section 194H of the Act. The case law relied upon by the ld. AR of CIT vs Intas Pharmaceuticals Ltd [2021 (8) TMI 1005 - GUJARAT HIGH COURT] is factually distinguishable and does not advance the case of the assessee herein. Hence it could be safely concluded that the assessee is bound to deduct tax at source, failure of which , would be invited with disallowance u/s 40(a)(ia) of the Act. We find lot of force in the alternative argument advanced by the ld.AR before us that in view of second proviso to section 40(a)(ia) of the Act, since the payees / recipients had disclosed the said receipts in their returns of income, no disallowance should be made in the hands of the assessee payer. In view of this second proviso, we direct the ld. AO to make factual verification as to whether the recipients had duly disclosed the subject mentioned receipts in their returns of income. The assessee is directed to furnish the necessary details in this regard in the prescribed form. If on verification, it is found that the recipients had disclosed the receipts from the assessee in their returns of income, even if the entire income of the recipients is exempt under the provisions of the Act in their hands, still the assessee cannot be treated as an ‘assessee in default’ and consequentially the disallowance u/s 40(a)(ia) of the Act made in the hands of the assessee payer would have to be deleted. Accordingly, the revised grounds raised by the assessee are disposed off in the abovementioned manner. Appeal of the assessee is partly allowed for statistical purposes. 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 194HBackground: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.