TaxTMI 
TaxTMI 
2012 (8) TMI 576
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....sment year has made commission payment of Rs. 56,30,173 to the following parties: Sl.No. Name of the party Amount (in Rs.) Contractual agreement with the assessee 1. Uniworld 16,04,717 Written 2. Australia Study Centre 6,35,359 Written 3. Uniworld Migration 6,93,573 Written 4. Education World Consultants 3,00,000 Written 5. Uniworld Education 15,07,966 Written 6. Sachin Brid 1,45,000 Oral 7. Megnus Consultants 36,236 Oral 8. Maxim Consultants 1,54,178 Oral 9. Shinde 25,000 Oral 10. Dilip Shah 59,900 Oral 11. Usman Kazi 38,000 Oral 12. Ashwin Diwani 40,000 Oral 13. Commission paid to various other parties 3,90,244 Oral Total 56,30,173 According to the Assessing Officer, since the assessee has not deducted tax at source while making payments of commission to the parties, therefore, it is a case of contravention of the provisions of section 194H of the Income-tax Act, 1961 ("the Act"). Accordingly, the assessee was asked to explain as to why the sum of Rs. 56,30,173 should not be disallowed ....
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.... it can be safely concluded that the said parties are rendering services to the assessee and are receiving commission by way of consideration for the services rendered. The assessee, after explaining the difference between application of income and diversion of income, submitted that 15 per cent of gross receipts get diverted to the said parties before reaching to him and, therefore, the provisions of section 194H are not applicable because the amount is not received by him as an income and he is not making payment thereof. However, the Assessing Officer did not accept the assessee's explanation. He was of the view that in view of the provisions of section 194H, wherever there is a payment by way of commission to a resident, tax has to be deducted at source by the person responsible for making such payment. In the present case, the said parties are rendering services to the assessee under contractual conditions. The assessee is responsible for paying commission to them. The quantum of the commission is fixed at 15 per cent of gross fees collected by the said parties from the students admitted to courses conducted by LITR, London. Therefore, the assessee is bound by the provisions o....
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....iaison offices, falls within the ambit of section 194H read with section 40(a)( ia) of the Income-tax Act, 1961." 6. At the time of hearing, the ld. D.R., while relying on the order of Assessing Officer, further submits that in view of the reasons mentioned in the assessment order, the ld. CIT(A) was not justified in holding that the payment of Rs. 56,30,173 to the liaison office is not an income liable for TDS deduction. He further submits that the ld. CIT(A) has also erred in deleting the disallowance of Rs. 56,30,173 without appreciating the fact that the said amount paid as commission to liaison office falls within the ambit of section 194H read with section 40(a)( ia) of the Act. He, therefore, submits that the order passed by the Assessing Officer be restored. 7. On the other hand, the ld. counsel for the assessee, while reiterating the same submissions as submitted before the Assessing Officer and the ld. CIT(A), further submits that in view of the Tri-party agreements with the assessee, franchisee/commission agent and his principal appearing at pages 51 to 74, receipts issued to U.K. based Institute appearing at pages 75 to 79 and the confirmation letters appearing at....
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....ee on the payment of commission to the commission agents, is liable to deduct TDS under section 194H of the Act and since he did not deduct the tax at source, the Assessing Officer was justified in disallowing the same under section 40(a)( ia) of the Act. The ld. D.R. further submits that the facts of all the cases relied on by the ld. counsel for the assessee are different and, therefore, the same are distinguishable and not applicable to the facts of the present case. He, therefore, submits that the order passed by the Assessing Officer be restored. 9. We have carefully considered the submissions of the rival parties and perused the material available on record. We find that the facts are not in dispute. We further find that it is also not in dispute that the assessee has paid commission of Rs. 56,30,173 to various parties without deducting tax at source on the ground that it had entered into a tri-party agreements and as per the agreement it was the duty of the franchisee/commission agent to collect fees from the students on behalf of the principal and send the gross receipts to the assessee in order to remit the same to the principal and in turn these parties are entitled to....
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.... 4 above. In case the party of the First Part fails to make payment then the Party of the second Part will be at liberty to deduct the said 15 per cent from the gross receipts of the subsequent fees from the students, which will be admitted by the Party of the Second Part on behalf of the Confirming Party viz. the said London Institute of Technology & Research, London." In this context, it is also pertinent to refer to the sample copy of the receipt issued by the franchisee/commission agent to the students which has also been reproduced by the ld. CIT(A) at page 8 of the appellate order, which is extracted hereunder : "UNI World Education Date: 17th May, 2004. To Digvijaysinh Vaghela, Ahmedabad. RECEIPT Received with thanks from Mr. Digvijaysinh Vaghela a Chq. No. 079458, dated 15-5-2004 for the amount of Rs. 2,13,200 (Two Lakhs Thirteen Thousand Two Hundred only) in favour of London Institute of Technology, Mumbai, Proprietor, Edroos Syed Mohamad Zakir. The fees is for the course of Diploma programme in Hotel Management including our professional fees of Rs. 31,980. For: Uniworld Education Sd/- Authorised Signatory" 12. From the combined reading....
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....in all the above decisions, it has been laid down that where by the obligation income is diverted before it reaches the assessee, it is deductible; but where the incomes is required to be applied to discharge an obligation after such income reaches the assessee, the same consequence, in law, does not follow. In other words, an obligation to apply the income in a particular way before it is received by the assessee or before it has accrued or arisen to the assessee results in the diversion of the income. On the other hand, an obligation to apply income which has accrued or arisen or has been received amounts merely to the apportionment of the income, and not to its diversion. 19. Examined on the touch-stone of the aforenoted legal principles, and keeping in view of our finding recorded in para 12 of this order, we are of the opinion that where an income is received by an agent, he receives it for and on behalf of his principal. There is no question of diversion by overriding title as the agent is bound to make over the income to the principal under the general law of agency. Therefore, the payment of commission amounts to discharge an obligation after such income reaches to the a....
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....e as commission under section 194H of the Act. 23. For easy reference, we extract hereunder the relevant portion of section 194H for the purpose deciding this issue :-- "194H. Commission or brokerage.-Any person, not being an individual or a Hindu undivided family, who is responsible for paying, on or after the 1st day of June, 2001, to a resident, any income by way of commission (not being insurance commission referred to in section 194D) or brokerage, shall, at the time of credit of such income to the account of the payee or at the time of payment of such income in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon at the rate of ten per cent. ** ** ** Provided also that no deduction shall be made under this section on any commission or brokerage payable by Bharat Sanchar Nigam Limited or Mahanagar Telephone Nigam Limited to their public call office 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 ....
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.... payment of such income in cash or by the issue of cheque or draft or by any other mode. This being so and keeping in view that the assessee in his books of account accounted for i.e. credited the full amount of commission as received from the franchisee/commission agent and debited separately the amount of commission paid, therefore, in any case, the assessee was liable to deduct TDS on the commission payment. 27. For the reasons as discussed above, we are of the view that since the assessee is liable to deduct TDS on the payment of commission under the provisions of section 194H of the Act and has failed to deduct the same, therefore, the Assessing Officer was justified in disallowing the payment of commission of Rs. 56,30,173 under the provisions of section 40(a)( ia) of the Act and the ld. CIT(A) was not justified in holding that the provisions of section 194H read with section 40(a)( ia) are not applicable and hence the appellant was not required to deduct TDS thereon. The order passed by the CIT(A) on this account is reversed and that of Assessing Officer is restored. The grounds taken by the revenue are, therefore, allowed. ITA No. 6171/Mum/2009 (AY: 2006-07): 28. T....