Consignment distribution and sales tax collections: distributor treated as service provider, so section 43B disallowance could not stand.

Where goods were distributed on consignment with title remaining in the principal until sale, the distributor was treated as an agent/service provider rather than a trading company. The arrangement showed stock and sales were controlled by the principal, prices were fixed by the principal, accounts were rendered on stock and sales, and the distributor earned only a fixed service charge. On that basis, sales tax collected in the course of such sales accrued to the principal and did not form the distributor's own trading receipt, so disallowance under section 43B was not sustainable against the distributor.

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Issues: (i) whether the assessee, acting as distributor of the principal on consignment basis, was a trading company or only a service company; and (ii) whether the sales tax collected by it on behalf of the principal constituted its own trading receipt so as to attract disallowance under section 43B.

Issue (i): whether the assessee, acting as distributor of the principal on consignment basis, was a trading company or only a service company.

Analysis: The distribution arrangement showed that the goods continued to belong to the principal until sale, the assessee only stocked, held and sold them on behalf of the principal, the sales were made at prices fixed by the principal, the assessee rendered accounts of stock and sales, and the assessee was paid a fixed service charge. These features established that the assessee did not deal in the goods on its own account.

Conclusion: The assessee was only a service company and not a trading company.

Issue (ii): whether the sales tax collected by it on behalf of the principal constituted its own trading receipt so as to attract disallowance under section 43B.

Analysis: Although sales tax collected in the course of sales is ordinarily a trading receipt, in the present arrangement the sale proceeds, including the tax component, accrued to the principal and the assessee collected and remitted the tax as distributor. The tax collection was therefore a trading receipt of the principal and not of the assessee, so the addition under section 43B could not stand against the assessee.

Conclusion: The sales tax collected by the assessee did not constitute its taxable trading receipt, and the disallowance under section 43B was not sustainable.

Final Conclusion: The appeal succeeded in full because the assessee was treated as a service company and the section 43B addition was deleted.

Ratio Decidendi: Where goods are sold on consignment basis and the property in the goods remains with the principal until sale, the distributor acts as an agent or service provider and sale-related collections belong to the principal for income-tax purposes.

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