2025 (3) TMI 588 - AT - Income Tax

Revision u/s 263 - TDS liability on Payments made to sales promoters claimed as reimbursements - PCIT quashed the assessment order and directed the assessing officer to pass the proper speaking order - PCIT on perusal of the data provided in Pen Drive observed that the terms of services agreed with the sales promoters by the assessee do not show that the reimbursement to retailers/distributors have to be made through sales promoters - As per CIT assessee failed to produce necessary documentary evidences to show that the payments made to the sales promoters were purely on account of reimbursements under its trade schemes HELD THAT - We observed from the submissions that there is no documented scheme available and it is decided by the marketing team and sales promoters. Assessee has maintained the debit notes month wise from the sales promoters and relevant disbursements to the sales promoters. With regard to disbursements to the retailers they have demonstrated few payments from the sales promoters to the retailers by bringing on record the bank statements. In our view no doubt the assessee has documented the trade scheme payments at the same time the AO has not fulfilled the mandate given to him by the coordinate bench to verify whether this transaction falls within the ambit of reimbursement. He has not passed a speaking order and was of the view that certain documents are suffice to demonstrate the scheme is reimbursement like agreement debit notes and disbursement by the assessee and further payments by the sales promoters to the retailers. He merely accepted the documents as submitted by the assessee and he has not made a case how the above documents are sufficient to grant the relief. No doubt he has allowed to the extent the assessee submitted the debit notes which are relevant to the respective assessment years. He has not made up a case how it is sufficient to give relief. There are certain unanswered issues which are a. It is not demonstrated how the sales promoters are compensated for their services. b. In case the scheme is devised by the marketing team with the concurrence of the sales promoters the sales promoters no doubt raised the debit notes and collected the discount from the assessee month wise in case the assessee intend to claim the same as reimbursement redistributed by the sales promoters to the respective retailers they have to submit the reconciliation statement month wise tallying with the debit notes and relevant disbursement to the retailers. No doubt there may be delay in distribution but the assessee has to demonstrate the month wise disbursement by the sales promoters. Without the above reconciliation it cannot be claimed as the reimbursement. Mere verification on the basis of the documents before the AO which he has no doubt allowed only 33% to 50% in the respective years cannot it be called verification he has only verified whether the relevant discount are relevant for the respective assessment year and accordingly he allowed the same. This is not the mandate given to him. He was directed to verify the payments to sales promoters are falling under the category of reimbursement or not. In case he is satisfied with the documentation he has to demonstrate by passing a speaking order. He has miserably failed in that aspect. He has given relief without proper verification and application of mind. Since Ld. PCIT has rightly quashed the assessment order and directed the assessing officer to pass the proper speaking order we do not see any reason to disturb the same and there will not be any prejudice caused to the assessee since the same documentation it has to file before the AO. Accordingly we direct the AO to verify the disbursement by the sales promoters to retailers with the respective debit notes raised by them. May be in the form of reconciliation debit note wise. This direction is only a compliment to the directions given by the Ld PCIT. In the result appeal filed by the assessee against the order passed u/s 263 is dismissed.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal issues considered in this judgment include:

• Whether the payments made to sales promoters by the assessee, claimed as reimbursements, were correctly characterized and whether they should be subject to tax deduction at source under section 194H of the Income-tax Act, 1961.
• Whether the Assessing Officer (AO) conducted a proper verification of the documents submitted by the assessee to substantiate the claim of reimbursements.
• Whether the Principal Commissioner of Income Tax (PCIT) was justified in invoking section 263 of the Income-tax Act to revise the AO's order as being erroneous and prejudicial to the interests of the Revenue.
• Whether the PCIT's invocation of Explanation 2 to section 263 was applicable and appropriate for the assessment year in question.
• Whether the AO's order was passed in haste without adequate verification of the documentation provided by the assessee.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Characterization of Payments to Sales Promoters

• Legal Framework and Precedents: The main legal provision in question is section 194H of the Income-tax Act, which mandates tax deduction at source on commission payments. The assessee claimed the payments as reimbursements, which would not attract TDS.
• Court's Interpretation and Reasoning: The Tribunal examined whether the payments were indeed reimbursements or commissions. It considered the agreements between the assessee and sales promoters, the nature of the transactions, and the evidence provided.
• Key Evidence and Findings: The assessee provided debit notes and bank statements to show payments to sales promoters and subsequent payments to retailers. However, the PCIT found a lack of one-to-one mapping and documentation to substantiate the claim of reimbursements.
• Application of Law to Facts: The Tribunal found that the AO did not adequately verify whether the payments were reimbursements. The PCIT's findings showed that the documentation was insufficient to prove the nature of payments as reimbursements.
• Treatment of Competing Arguments: The assessee argued that the AO had verified the documents and allowed the claim partially. The Revenue, through the PCIT, argued that the verification was inadequate and the payments were commissions.
• Conclusions: The Tribunal upheld the PCIT's view that the payments were not adequately substantiated as reimbursements and were subject to TDS under section 194H.

Issue 2: Justification for Invoking Section 263

• Legal Framework and Precedents: Section 263 allows the PCIT to revise an AO's order if it is erroneous and prejudicial to the interests of the Revenue.
• Court's Interpretation and Reasoning: The Tribunal considered whether the AO's order was erroneous due to inadequate verification and whether it prejudiced the Revenue.
• Key Evidence and Findings: The PCIT found that the AO had not conducted a comprehensive examination and had accepted the assessee's submissions without proper scrutiny.
• Application of Law to Facts: The Tribunal agreed with the PCIT that the AO's order was erroneous and prejudicial, as it did not fulfill the mandate of verifying the nature of payments.
• Treatment of Competing Arguments: The assessee contended that the PCIT's invocation of section 263 was unwarranted. The Revenue maintained that the AO's order lacked proper verification.
• Conclusions: The Tribunal upheld the PCIT's invocation of section 263, finding that the AO's order was indeed erroneous and prejudicial to the Revenue.

Issue 3: Applicability of Explanation 2 to Section 263

• Legal Framework and Precedents: Explanation 2 to section 263 specifies conditions under which an order is deemed erroneous.
• Court's Interpretation and Reasoning: The Tribunal considered whether Explanation 2 was applicable to the assessment year in question.
• Key Evidence and Findings: The PCIT applied Explanation 2, arguing that the AO's order was passed without proper verification.
• Application of Law to Facts: The Tribunal found that the PCIT's application of Explanation 2 was appropriate given the lack of adequate verification by the AO.
• Treatment of Competing Arguments: The assessee argued that Explanation 2 was not applicable. The Tribunal disagreed, finding it relevant to the case.
• Conclusions: The Tribunal upheld the PCIT's application of Explanation 2, supporting the revision of the AO's order.

3. SIGNIFICANT HOLDINGS

• The Tribunal upheld the PCIT's order under section 263, finding that the AO's order was erroneous and prejudicial to the interests of the Revenue due to inadequate verification of the nature of payments.
• The Tribunal agreed with the PCIT that the payments to sales promoters could not be substantiated as reimbursements and were subject to TDS under section 194H.
• The Tribunal found that the PCIT's invocation of Explanation 2 to section 263 was applicable and appropriate, given the circumstances of the case.
• The Tribunal dismissed the appeals filed by the assessee, affirming the PCIT's decision to revise the AO's order.