TaxTMI 
TaxTMI 
2009 (7) TMI 827
X X X X Extracts X X X X
X X X X Extracts X X X X
....referred to as 'assessee dairy' or assessee. A spot verification was conducted by the ITO (TDS) on dt. 27th Nov., 2007. Resultantly the Department was of the view that the assessee was not deducting tax at source (TDS) on the payments made to the distributors though required under s. 194H as it was a payment made on account of commission. The ITO referred to the contract entered with one Mr. R.K. Lonugani. He also referred to the statement of the director (Finance) Shri Vinod Kumar Kanoongo and alleged that contrary to his explanation, from the terms and conditions of the aforesaid contract, it was clear that milk and milk products were being distributed to the milk booth owners through the distributors, who were being paid commission. After referring to s. 194H, Explanation, the ITO was of the view that the distributors were indirectly receiving payment for services rendered. The assessee was therefore, given a show cause towards the alleged failure to deduct the tax at source and to show why assessee be not treated as assessee in default and also why interest under s. 201(1) should not be charged from the assessee. The assessee through w/s dt. 16th Dec., 2007 mainly contended tha....
X X X X Extracts X X X X
X X X X Extracts X X X X
....mmission" or "brokerage" only and nothing else. He submitted therefore, one has to be clear as regards the distinction between the contract for sale and contract for agency. There is an essential distinction between a contract of sale and a contract of agency, by which the agent is authorized to sell or buy on behalf of the principal. The clement of agency has to be there in case of all services or transactions contemplated by Expln. (i) to s. 194H. He drew our attention towards the dictionary meaning of the words 'agency', 'agent' and 'principal', in Black's Law Dictionary. He further submitted that the element of agency has to be there in case of all services or transactions contemplated by Expln. (i) to s. 194H. There is a distinction between a contract of sale and a contract of agency by which the agent is authorized to sell or buy on behalf of the principal. The essence of a contract of sale is the transfer of title to the goods for a price paid or promised to be paid. The transferee in such a case is liable to the transferor as a debtor for the price to be paid and not as agent for the proceeds of the sale. The essence of agency to sell is the delivery of the goods to a perso....
X X X X Extracts X X X X
X X X X Extracts X X X X
....t and get the full payments in advance or as per the financial securities and other related aspects upto its own satisfaction. The ownership over the goods stands immediately transferred, the moment it is delivered to the distributor. It becomes the property of the distributor who is the legal owner of the milk so purchased from the assessee for all intent and practical purposes. In case, there is a loss of the milk or deterioration in the quality, for whatever reason, the assessee is neither to make good the loss so caused nor to compensate the distributor in any manner. To support his contention, learned Authorised Representative submitted that the subjected transactions were between principal to principal and the nature of the transaction as explained above is also duly and fully supported by the entries made by the assessee in the books of account regularly maintained by it. He submitted that it was only the net amount, (i.e., the total amount raised in the bills after reduction of (the margin or) the trade discount so allowed to the dealer), which was credited to P&L a/c. He submitted that the accounts maintained on a regular basis, is admissible and operate as a binding evide....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... by the distributor. He submitted that on the other hand, notably the distributors also in their accounts, have shown the milk so purchased from the assessee as their own purchases. The opening and closing stock of the milk has also been shown as their respective trading account/s as their own stock and not as consignment stock, which strongly suggest that the ownership of the goods remains with the distributor, the moment it takes the delivery. The learned Authorised Representative further submitted that as regards the objection of the learned CIT(A) that there was no sale bills being issued by the assessee and it was only gate pass and cha1lans, which merely showed the delivery of the goods, it was submitted that the learned CIT(A) proceeded on a misconception of law and facts both, in as much as because of the custom and usage prevailing between the parties for years together, the gate pass itself had acquired the shape of an invoice, which legally bind the buyer due to the legal relationship and implication flowing therefrom between the parties. Notably it is not only the quantity but also the rate and the amount (payable by the distributor to the assessee as a purchase conside....
X X X X Extracts X X X X
X X X X Extracts X X X X
....istributor as to how the distributor should carry on his day to day business, to which the distributor was fully free and independent to run his own way. He submitted that the learned ITO at p. 5 para last inferred from the terms and conditions that "the distributors do not have any substantial independence in carrying out their own transaction as against the total independence enjoyed by the principal. On the contrary, it appears that the distribution is just acting as an arm of the assessee and provided certain reasons at p. 6, however, he did not substantiate the same. He clarified that the only thing which, the assessee wanted to assure is that the milk reaches the destination well in time and without any delay therein. The reasoning behind this is that the milk being covered by the Essential Commodities Act and any delay in the supply, may be a cause of public resentment. In a welfare State, the assessee is discharging its duties being a part of the co-operative movement. As submitted earlier also, the assessee is a co-operative society registered under s. 25 of the Companies Act, 1956 being an organization working on a no profit no loss basis. In any case however, it is on wo....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ong in the past. It is for the first time; the Department took a different view although the facts and circumstances prevailed exactly the same as were in the past. The learned Authorised Representative thereafter, took us through the detailed and elaborate statement given by Shri Vinod Kanoongo, manager finance, recorded at the time of survey at paper book pp. 44-50. The learned Authorised Representative also submitted that the reliance placed by the AO on the Explanation below s. 194H to the effect that the distributors were indirectly receiving payment for services rendered, was devoid of any merit in view of the above facts law and submissions. In the alternative, the learned Authorised Representative submitted that assessment of the payees stood completed and to the best of his knowledge the demand if any, has already been paid, as conveyed by the learned local counsel of the assessee Shri Harish Chandra, FCA and the Shri Vinod Kanoongo also, hence there cannot be any valid recovery of TDS, as recently held in CIT vs. Rajasthan Rajya Vidyut Prasaran Nigam Ltd. (2006) 287 ITR 354 (Raj), where the Tribunal found that there was a refund on the income of the recipient due to TDS h....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e franchisees. Explanation: For the purposes of this section,- (i) 'commission or brokerage' includes any payment received or receivable, directly or indirectly, by a person acting on behalf of another person for services rendered (not being professional services) or for any services in the course of buying or selling of goods or in relation to any transaction relating to any asset, valuable article or thing, not being securities; (ii) the expression 'professional services' means services rendered by a person in the course of carrying on a legal, 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 purpose of s. 44AA; (iii) the expression 'securities' shall have the meaning assigned to it in cl. (h) of s. 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 provision....
X X X X Extracts X X X X
X X X X Extracts X X X X
....sent another in dealings with third persons. The person for whom such act is done, or who is so represented is called the 'principal'. In order to see whether the principal-agent relationship existed between the assessee and the distributors, we may first carefully note the facts and circumstances of the case. The learned Authorised Representative took us to the detailed and elaborate statement given by Shri Vinod Kanoongo, manager finance, recorded at the time of survey and copy placed at paper book pp. 44-50, which, we find very useful to understand the facts. It is noticed that the assessee is engaged in two types of activities. Firstly, in the procurement i.e., purchases of the milk from the various milk producers and the transportation of the milk so purchased, to the processing plant of the assessee. Separate contracts have been entered for this purpose, with the transporter and TDS has duly been made on the payment of transportation charges under s. 194H as noted elsewhere in this order. Secondly, after purchases and receipt of milk, the same is processed at the plant of the assessee dairy upto the required level, which results into by-products. The distributors are appointe....
X X X X Extracts X X X X
X X X X Extracts X X X X
....han 'Takedar', Privahan 'Takedar' or Vitrak for one person only i.e., distributor. Therefore, it is totally wrong to stick to a word used in the contract. A document has to be read in its entirety and the parties are not allowed to read only that part which is suitable to them and to ignore the remaining part. The presumption raised or inference drawn placing reliance on a document, has to be for the entire document and not for a part only. It is only the substance which shall prevail over the form. The rights and obligations of the contracting parties, cannot be determined as per their own reading of the contract. Here a useful reference can be made to the decision in Kedarnath Jute Mfg. Co. Ltd. vs. CIT (1971) 82 ITR 363 (SC). We agree with the contention of the learned Authorised Representative that the terms and conditions contained in the schedule annexed with the contract, or in the tenders, should not be confused with the essence of the contract which is basically in the nature of a contract of sale. We also agree that various directions given by the assessee to the distributors in the terms and conditions were merely to assure that the milk being covered by the Essential Co....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... and deposited under s. 194C in his case, is also evident from a perusal of a copy of Form 16A at paper book 43. However, such submissions and facts were rather misinterpreted by the authorities below. The law relating to the principal-agent contemplates the agent to work for and on behalf of the principal, on pre-decided terms and conditions and to render services in that accord only. Any loss or gain in the hands of the agent resulting from the transactions entered for and on behalf of the principal, are the loss or the again of the principal and not of the agent whereas, in case of principal to principal transaction, both are liable to bear the financial loss or gain/other implications. Applying the above principle on the facts of the present case, we find that the so-called agent i.e., the distributors, who are the dealers in fact, and in law, are not working for and on behalf of the principal. The relationship of agency is absolutely missing between the parties. The authorities below have not brought anything to establish such a relationship. The assessee dairy is not to direct the distributor as to how the distributor should carry on his day to day business. The distributor i....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ssessee. It is not disputed that the sales proceeds i.e., the receipt from the distributors were credited by the assessee to a separate sales account and has also been shown as the goods sold in the audited trading accounts. The assessee has credited such receipt as sales of milk and milk products. This year total sales of milk have been shown at Rs. 48,47,75,127.89. After including sale of various other milk products; the total sales was of Rs. 97.17 crores. As regards the objection of the learned CIT(A) and the contention of the learned Departmental Representative, that there were no sale bills being issued by the assessee and it was only gate pass and challans, which merely showed the delivery of the goods, it is noticed from the copies placed at paper book pp. 36-37 that not only the quantity but also the rate and the amount, payable by the distributor to the assessee as a purchase consideration, duly mentioned and therefore, it was wrong to say that it was not a sale invoice. It was not denied by the learned Departmental Representative that similar practice prevailed in the past. Hence, because of the custom and usage prevailing between the parties for years together, the gate....
X X X X Extracts X X X X
X X X X Extracts X X X X
....of Shri Sukhpal Choudhary the ITO, Ward 2(2) has confirmed the purchases and sales made by the distributor itself in asst. yr. 2006-07. In the context of TDS, the accounting treatment by the parties is quite relevant as held in CIT us. Century Building Industries (P) Ltd. and Asstt. CIT vs. The Samaj. On a perusal of the record, it cannot be denied that the ITO was specifically requested vide letter dt. 26th Feb., 2008 to summon those distributors. However, the ITO chose not to take any action, even though all such distributors are income-tax assessees at Ajmer itself. Nor the ITO could rebut the confirmations obtained from the distributors and submitted to ITO vide letter dt. 6th Dec., 2007 at paper book 3 para 9 of the assessee. In the confirmations, the distributors have categorically affirmed their relation with the assessee as the seller and they being the buyer, worked independently. They also denied applicability of s. 194H. The ITO placed reliance on a Circular No. 619, dt. 4th Dec., 1991 (AO p. 6 para 6) however, the same do not help the ITO in any manner in as much as there is no occasion to retain of commission/brokerages by the distributor as the entire sales proceeds a....
X X X X Extracts X X X X
X X X X Extracts X X X X
....contacted, so the milk was sold in 500 or 100 ml. pouches. At the time of procurement, the appellant pass 90 paise per litre to such unions or federations towards cost, container charges, management expenses, and chilling charges. The bifurcation of this 90 paise being incurred on such various heads has also been discussed above. The next phase was selling of milk through milk booths. Appellant used to sell 1,000 ml pouch of milk to Kiosk owner @ 11.10 paise per litre and expected to sell the milk at Rs. 12 per litre. So there was a margin of 90 paise per litre. This difference between the procurement price and the maximum retail price for the Kiosk owner was stated to be reimbursement of transport cost, container charges, management expenses and chilling charges. In respect of both these transactions, the Revenue authorities have held that the appellant was liable for TDS and held the assessee a defaulter. As far as the related provision is concerned, s. 201(1) prescribes that if any person referred to in s. 194 does not deduct the tax or after deducting fails to pay the tax, then he shall be deemed to be an assessee in default in respect of the tax. Next, comes into operation is ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....essions 'commission and brokerage' nave been used not only in juxtaposition but in collocation with another phrase, i.e., 'acting on behalf of another person for services rendered'. It is well-settled that statutory definitions or provisions must be read subject to the qualification variously expressed depending upon the subject or the context. So, a judicial authority has not only to look at the words but also to look at the context, the collocation and the object of such words relating to such matter and interpret the meaning intended to be conveyed by the use of such words under the circumstances. Hence, the rule of 'ejusdem generies' has to be observed, i.e., whether statutes are to be understood in terms of their plain language or in terms of their intention have long been a matter of controversy and there are numerous judgments upholding the strength of the argument on either side. In the final analysis there is no controversy and it is only a question of approach. The first approach should be to read the word as they are. If they give a coherent and cogent meaning without leading to absurd or anomalous result, then the only thing that should be done is to follow the words of....
X X X X Extracts X X X X
X X X X Extracts X X X X
...., heavily relied upon by the learned Authorised Representative, the Hon'ble Court, after analyzing the provisions of the Stamp Rules of Gujarat, held that the stamp vendors are not "agents" of the Government, though under the rules they have to be licensed and are subject to strict discipline in regard to purchase and sale of stamps from Government. Based on the finding, the Court held that discount allowed to stamp vendors do not constitute "commission" or "brokerage" to attract TDS on it under s. 194H of the Act. It is clear from the definition of "commission and brokerage" as contained in Explanation to s. 194H that the commission or brokerage that attracts TDS is the one paid for "services rendered by a third party like a broker or an agent and cannot be, the buyer as the buyer is not rendering any service except buying. Therefore, obviously payments to third parties involved in sale or purchase such as commission agent or a broker, is covered by s. 194H of the Act. Discount granted on sale of stamp paper to the licensed stamp vendors by the Treasury therefore, cannot be termed as "commission or brokerage" to attract TDS. The element of agency has to be there in case of all ser....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ssessee receives fixed amount including service charges-Assessee is not making any reimbursement of the expenditure incurred by the PMA and his retailers-Agreement also provides certain conditions relating to protection of intellectual property rights of the assessee-Legal relationship between assessee and PMA is thus of seller and purchaser, hence no tax under s. 194H is required to be deducted at source on discount given by the assessee to PMA on SIM cards/recharge coupons." We are aware of a decision of this Bench in the case of Hindustan Coca Cola Beverages (P) Ltd. vs. ITO (2005) 98 TTJ (Jp) 1, wherein, the facts were that commission on sale of goods by the distributors, who were allowed to make sales only in the area precisely specified by the assessee company and they had no independence whatsoever of fixing the sale price by reducing their margins. Moreover, the assessee compensating the distributors for the loss in value of stock on reduction of MRP also, if the stock with the distributor is not sold before the expiry date, loss accruing on this account is borne by the assessee sales executives and auditors of the assessee company regularly monitoring the operations and t....