Substance over label in distribution contracts means no agency arises where the distributor buys and resells on its own risk.

Commercial labels in a distribution agreement are not conclusive; the true legal substance controls whether an agency exists for tax purposes. Because the distributor had to pay the invoice price, resell on its own account and at its own risk, could not bind the importers or pledge their credit, and dealt independently with customers and sub-distributors, the arrangement was treated as a buyer-reseller relationship rather than principal and agent. The return of unsold goods did not alter that character. On that basis, compensation received under the arrangement was not taxable as agency income.

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Issues: Whether the distribution agreement created an agency relationship so as to attract tax on the compensation received under section 10(5A) of the Indian Income-tax Act, 1922.

Analysis: The agreement described the assessee as a distributor, but the decisive question was its true legal substance. The clauses showed that the assessee was required to pay the invoice price of the goods, could resell them on its own account and at its own risk, was not authorised to contract in the importers' name or pledge their credit, and was responsible for its own dealings with customers and sub-distributors. The return provisions for unsold goods did not change the essential character of the arrangement. On that construction, the assessee was not acting as a mere conduit or representative of the importers, and the relationship of principal and agent did not arise.

Conclusion: The agreement was not an agency agreement, and the sum of Rs. 50,000 was not taxable under section 10(5A).

Ratio Decidendi: The label used in a commercial agreement is not conclusive; where the substance of the arrangement shows that the so-called distributor buys and resells goods on its own behalf and at its own risk, no relationship of agency arises.

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