TaxTMI 
TaxTMI 
2005 (7) TMI 306
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.... per the provisions of section 194H of the Act." Ground No. 10 "The impugned order has been passed in gross violation of the principles of natural justice as the CIT(A) has disregarded the evidences furnished by the appellants to being additional evidences not permissible under rule 46A even though the said evidences arc critical for a proper appreciation of facts and just and equitable adjudication of the matter thereafter." Ground No. 13 The CIT(A) erred in upholding the order under section 201 on irrelevant considerations and in failing to quash the conclusions reach on irrelevant and wrong facts." 3. The main issue in both the appeals are that the Assessing Officer has passed order under section 201(1) for not deducting tax at source under section 194H of the Act on distribution and commission from 1-6-2001 onwards. 4. The brief facts of the case are that the assessee is a company engaged in the manufacturing and distribution of non-alcoholic beverages packed in glass bottles and plastic crates. The Head Office of the assessee is based in Gurgaon while it has a branch office as well as production unit at Kaladera, Jaipur. The assessee h....
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....o assume otherwise would be contrary to facts of the case. (d) Just because the margin of the distributor appears to be "constant" a conclusion cannot be made that the same is commission. The margin of all those involved in a modern supply chain for products which have a Maximum Retail Price prescribed by law would necessarily be predetermined. This does not convert a principal to principal relationship to that of a principal and agent. (e) The distributor is not authorized to do any acts on behalf of the company. When he sells to the retailer, he sells in his own right and any credit risk etc., arising from the transaction is solely his. This is borne out by the invoice that he raises on the retailer. The invoice is raised in his own right and not on behalf of the company. (f) The nomenclature distributor commission appearing in their books is a misnomer. It is just an accounting entry generated for Management Information System purposes to identify channel costs. This is also borne out by the fact that corresponding credit in the journal entry is to gross sales and not to be account of any distributor. It is an entry passed at the month end as follows: ....
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....hey are working on commission basis for the assessee-company. In response to question No. 8 of Shri Purushottam, question No. 3 of Shri Kedar Gupta and question No. 4 of Shri Rajesh Kumar (statement dated 13-1-2003) have categorically stated above fact. (b) No independence for fixing the sales price to the distributors: In principal-to-principal relationship, within the restrictions of MRP, a principal enjoys full freedom of fixing a sale price. However, in this case, the distributors do not have any independence whatsoever to do so by reducing their margins. In response to question Nos. 8 and 16 of Shri Purushottam, question No. 2 of Shri Kedar Gupta and question Nos. 4 and 5 of Shri Rajesh Kumar (statement dated 13-1-2003) have categorically stated above fact. (c) Fixed area of operation: In principal-to-principal relationship once the goods are sold there can be no restriction imposed by one principal on the other one as regard to his area of operation. However in this case, the distributors can make sales only in the area precisely specified by the assessee-company. In response to question No. 7 of Shri Purushottam, question Nos. 2 and 3 of S....
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....en the stock of the distributor is controlled by the assessee-company. (g) Appointment of sub-distributors by assessee-company: Once the goods are sold to the distributor, how the goods are sold further by him should be solely his discretion in principal-to-principal relationship. However, they have no right to appoint any sub-distributor. At the same time, company can appoint any sub-distributor and direct distributor to supply goods to such sub-distributors and importantly the entire margin (commission) receivable by such sub-broker from the company is first paid by the distributor and then only a part from the same is recoverable by the distributor from the company by making a claim of spoke discount (question No. 2 of the statement of Shri Rajesh Khandelwal dated 15-1-2003 and question No. 14 of Shri Purushottam) (h) Different type of claims received by distributors from the company: A large number of claims, which would never be available in principal-to-principal relationship are made by the distributors and paid by assessee-company. Some of such claims are as follows: (i) Diesel and petrol claim to meet part of the distribution ex....
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....such situations. In fact, Pucca Arahtia, which is a known category of commission agents operating all over the country specially in Mandies are also responsible for the collection of payments. Similarly, share brokers are also acting as Brokers or commission agents on behalf of sellers are fully responsible for collection of sale proceeds and bad debts. Thus, above argument of assessee is clearly not tenable and not sufficient to prove its point of view. 11. Assessee's reliance on the judgment of Gujarat High Court in the matter of Ahmedabad Stamp Vendor Association is also misplaced, under above facts and circumstances. In that case, the restrictions imposed on Stamp Vendors are very few and not substantial in nature unlike this case-Moreover, there are several restrictions in respect of sale of stamps placed by the law of land and therefore, they are mandatory. In this case however, the restrictions, which are substantial in nature, govern the relationship between assessee and distributors and are not borne out of any legal restrictions. 12. It has been further argued on the basis of decision of Hon'ble Supreme Court in the case of Bhopal Sugar Industries Ltd. that ....
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....B. The rate at which the sales invoice is to be raised on backward calculation method in a manner that distributor margin and retailer margin remains constant. It also shows that the price at which distributor has to sell goods to the retailer is also decided by the company itself. Importantly, in respect of transportation of goods from assessee's premises to the distributor's premises also, distributors have no independence. Though, the freight is to be charged from the distributor, it is charged only at notional figure at Rs. 11 per crate. If the freight would have been charged on the basis of real expenditure, it would have been different for distributors located at different distances. However, it can be seen that be the distributor based in Chomu at a distance of 50 kms. or he is based in Udaipur at a distance of about 500 kms. The freight is charged at the same rate. The entire Scheme of 'indirect distribution' clearly show that the real sale to retailer is being made by the company itself through the distributor appointed for local distribution by paying them commission and making them responsible for collection of payment and distribution work in geographica....
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....rdingly held the assessee liable under section 201(1) of the Act as deemed to be an assessee in default in respect of the tax and raised the demand of Rs. 35,72,898 for the financial year 2002-03 (Assessment year 2003-04) and Rs. 16,82,171 for the financial year 2001-02 (Assessment year 2002-03) being the tax at source not deducted under section 194H and interest thereon. 16. Before the Ld. CIT(A) the assessee-company raised as much as seventeen objections against the passing of order of Assessing Officer under section 201(1) of the Act and the demand as above said, which are available in Ld. CIT(A) orders pages 2 to 4. The main argument before Ld. CIT(A) being the same as before the Assessing Officer, apart from an application under rule 46A of Income-tax Rules, 1962 for additional evidence, wherein certificates from fifteen distributors clarifying that they were not agents of the appellant company were obtained after passing of the order under section 201(1), available on record at P.B. 317 to 336. The Ld. CIT(A) rejected the request of the appellant for admission of additional evidence observing in para 4.3 of his order that as per statements given by the distributors at the ....
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.... these circumstances then there will be no need for anybody to deduct any TDS." 18. The Ld. CIT(A) vide his order para 4.5 has distinguished the decision of Hon'ble Gujarat High Court in the case of Ahmedabad Stamp Vendor Association v. Union of India [2002] 257 ITR 202 which reads as under: "I have respectfully perused this citation and noticed that in this case the State Government is supplying stamp papers at a discount to its vendors. The Hon'ble Court in this case has held that the discount does not fall within the ambit of the definition of commission or brokerage. In the present case, the seller i.e. the appellant company in its trial balance at pages 11 & 12 has separately debited various types of discount such as outlet discount, spoke discount and trade discount. Therefore, Distributors commission is distinct from discount as held in the case of Ahmedabad Stamp Vendors Association. In the case of Ahmedabad Stamp Vendors Association no services are stated to have been provided by the State Government except refund of outdated stamp papers whereas in the instant case the appellant company as held by the ITO has provided the following services which prove....
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....signee/agent amounts to constructing payment of the same to him by the consignor/principal deduction of tax at source is required to be made from the amount of commission. Therefore, the consignor/principal will have to deposit the tax deductible on the amount of commission income to the credit of the Central Government, within the prescribed time." 23. In view of above facts and circumstances the Ld. CIT(A) was of the opinion that action of ITO (TDS) was justified and is in accordance with Income-tax Law. 24. Aggrieved by the decision of Ld. CIT(A) the assessee is before us for adjudication. 25. With this background, we heard the rival submissions and having perused the orders of authorities below, written arguments by the Ld. AR running into pages 1 to 30 and paper book containing pages 1 to 506 including the copies of various judgments relied upon by the Ld. AR, and the arguments of Ld. DR who has relied upon the orders of authorities below, a decision has to be arrived at looking into the statutory provisions. 26. At the outset on the persistent demand of the bench, to the Ld. AR to produce the copy of agreement/contract entered into by the assessee and its distribu....
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....very of debts for goods sold by the distributor are sole responsibility of the distributor. The Ld. AR has argued that essence of agency is the delivery of goods to a person who is to sell them, not as his own property but as the property of the principal who continues to be the owner of the goods and will therefore be liable to account for the sale proceeds. The Ld. AR has relied upon decisions of various courts to substantiate his claim referred in written arguments pages 1 to 30 as under: (i) Sri Tirumala Venkateswara Timber & Bamboo Firm v. CTO AIR 1968 SC 784. (ii) Ghasiram Agarwalla v. State AIR 1967 Cal. 568 (FB). (iii) Dy. CAIT/CST v. Alwaye Agencies [1974] Tax L.R. 2281. (iv) Bhopal Sugar Industries Ltd. v. STO [1977] 40 STC 42 (SC). (v) Ahmedabad Stamp Vendor Association v. Union of India [2002] 257 ITD 202 (Guj.) (vi) Asstt. CIT v. Samaj [2001] 77 ITD 358 (Cuttack) 30. The proposition of law as argued by Ld. AR is not in dispute and is well settled and also is part of Indian Contract Act itself. But in reality the transaction between the assessee and its distributor on principal-to-principal basis are not applicabl....
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....right to appoint any sub-distributor. At the same time, company can appoint any sub-distributor and direct distributor to supply goods to such sub-distributors. (ix) A large number of claims, which would never be available in principal-to-principal relationship are made by the distributors and paid by assessee-company. Some of such claims are as follows: (a) Diesel and petrol claim to meet part of the distribution expenses. (b) Vehicle repair to meet part of the distribution expenses. (c) Salary to salesmen claim to meet part of the expenditure in off-season. (d) Leakage and breakage claim in respect of leakage and breakage between distributor and retailer. (x) It was also found that assessee-company had provided vehicles to some of the distributors for carrying out their distribution operations. Thus, some vehicles owned by assessee-company are used by the distributors and the depreciation on these vehicles is claimed by assessee-company. Firstly, if the distributors were independent principals why would company provide them with its own vehicle for the sales made by the distributor, which should be an independent operation of ....
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....5-2002 (VKIA + Kaladera) J Journal 97,35,943 Gross revenue-Customer Being GR booked for 1446-37 cases has been sold during the month of May 2002 as per enclosed reconciliation J Journal 14,86,999 Gross revenue-Customer Being reversal entry passed of JV No. 763 J Journal 97,35,943 Gross revenue-Customer Being reversal entry passed of JV No. 769 J Journal 14,86,999 Gross revenue-Customer Being GR booked for 1446-37 cases has been sold during the MO May 2002 is per enclosed reconciliation J Journal 14,88,044 Carried over 2,66,65,457 1,12,22,942 33. From the above it is clear that the assessee has made the entries in its books of account debiting commission account as an expenditure and crediting the same to gross revenue account. This cannot be lost sight in view of judgment in the case of State Bank of Travancore v. CIT [1986] 158 ITR 102 (SC). In that case sticky loans, interest were credited to suspense account by debiting to various sundry debtors and interest was not shown as income in the profit and loss a....
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....llect the money from retailer cannot be to retain the same but send the same to the assessee. There is an old section 194H which is in pari materia with the present section 194H. The old section came in statute book w.e.f. 1-10-1991 and remained effective upto 31-5-1992. In pursuance of which there is a Board Circular No. 619, dated 4-12-1991, which has also been mentioned by the CIT(A) in his order and the relevant para of the circular reads as under:- "6. A question may arise whether there would be deduction of tax al source under section 194H where commission or brokerage is retained by the consignee/agent and not remitted to the consignor/principal while remitting the sale consideration. It may be clarified that since the retention of commission by the consignee/agent amounts to constructive payment of the same to him by the consignor/principal deduction of tax at source is required to be made from the amount of commission. Therefore the consignor/principal will have to deposit the tax deductible on the amount of commission income to the credit of Central Government, within the prescribed time, as explained in succeeding paragraph." 37. And the law of interpretation....
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....l, medical, engineering or architectural profession or the profession of accountancy or technical consultancy or interior decoration or such other profession as is notified by the Board for the purposes of section 44AA. (iii) the expression "securities" shall have the meaning assigned to it in clause (h) of section 2 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956). (iv) Where any income is credited to any account, whether called "Suspense account" or by any other name, in the books of account of the person liable to pay such income, such crediting shall be deemed to be credit of such income to the account of the payee and the provisions of this section shall apply accordingly." 39. On perusal of Explanation to section 194H, it is evident that not only directly even indirectly any payment received by the assessee or any payment received for any services in the course of buying or selling of goods or where any income is credited to any account called by any other name in the books of account of the person liable to pay such income, such crediting shall be deemed to credit or such income to the account of the-payee and the provisions of this sectio....