2025 (6) TMI 1755 - AT - Income Tax

Disallowance u/s 40(a)(ia) - target discount consistency discount and cash discount provided to spare parts dealers - CIT(A) after considering the submission of assessee confirm the action of AO by holding that discount scheme are directly passed through credit notes - HELD THAT - It is clear that assessee has paid commission to its dealers under the cover of sales discount and it should be disallowed by apply provision section 40(a)(ia). We find that the assessee right from the beginning has claimed the relationship of assessee with its dealers were based on agreement that is of principal to principal (P2P) basis and not that of agent. The AO as well as CIT(A) has not given any adverse remark on the various clauses of the agreement of assessee with its dealers. In our view the fundamental principle and requirement for making TDS arise when the person is responsible for making some payment. However in the cash in hand the assessee in fact is not responsible for making payment to his various dealers rather sold the spare parts on certain terms and conditions. Such terms and conditions are agreed to regulate the price. In fact the dealers are making payment against the spare parts supplied to them by the assessee under the terms and conditions of dealership. We find that Hon ble Apex Court in CIT Vs Ahmadabad Stamp Vendors Association 2012 (9) TMI 298 - SC ORDER while confirming the finding of Gujarat High Court held that discount given to Stamp Vendors for purchasing stamp in bulk quantity was in the nature of cash discount in transaction of sale an therefore section 194H has no application to that transaction. Assessee The Gujarat High Court held in said case 2002 (6) TMI 32 - GUJARAT HIGH COURT held the licensed vendor has to pay less the discounted at the rate provided in the Gujarat Stamp duty and Sales Rules. The liability of the Stamp Vendor to pay the price less the discount is not dependent upon or contingent to the sale of the stamp paper by the Licensed Vendor. The licensed vendor would not be entitled to get any compensation or refund of the price if the stamp papers were to be lost or destroyed. The Gujarat Stamps Supply and Sales Rules themselves contemplate that what the licensed vendor does while taking delivery of the stamp papers from the Government offices is purchasing the stamp papers. We find that the assessee has furnished copy of agreement with its distributors and the details of payments of various discounts to dealers. No investigation of facts from such dealers about treatment of such discount is carried out if they have shown such payment as commission income or their business income. No adverse remark on various terms and conditions of distributor agreement is made by assessing officer. The assessee is a well-known auto mobile manufacturer in India and claimed that they are consistently following similar practice from various decades and such discount payment/concession was started doubting by revenue authorities from last certain years only. No survey action was carried out by TDS authorities. There is no evidence or material on record to suggest that discount allowed by assessee is against the commission payment or that the dealers were not doing their business independently or merely acting an agent of assessee. On careful perusal of the definition of commission or brokerage as given in Explanation to section 194H we find that to bring any payment within the Explanation the payment received or receivable directly or indirectly is 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 and / or in relation to any transaction relating to any asset valuable article or thing. So there must be an element of agency is to be there in case of all services or transactions contemplated by Explanation (i) to section 194H. Thus we do not find any justification for treating the discount as a commission payment for attracting provision of section 40(a)(ia). Appeal of assessee allowed.

Summary

The core legal questions considered in this appeal pertain to the applicability of section 40(a)(ia) of the Income-tax Act, 1961, specifically whether certain discounts provided by the assessee to its spare parts dealers-namely target discount, consistency discount, and cash discount-should be treated as commission payments attracting tax deduction at source (TDS) under section 194H, and consequently, whether the disallowance of such amounts under section 40(a)(ia) is justified.

Key issues include:

• Whether the discounts given to dealers are in the nature of commission or merely trade discounts.
• The nature of the relationship between the assessee and its dealers-whether principal-to-principal or principal-agent.
• The applicability of TDS provisions under section 194H on the discounts paid.
• Whether the disallowance under section 40(a)(ia) is warranted for non-deduction of TDS on these discounts.

Regarding the first issue of characterization of the discounts, the legal framework involves the interpretation of section 40(a)(ia) which disallows expenses where TDS under section 194H (on commission or brokerage payments) has not been deducted. Section 194H defines commission or brokerage as payment for services rendered by a person acting on behalf of another in buying or selling goods. The Court considered precedents including the Supreme Court decision in CIT Vs Ahmadabad Stamp Vendors Association, which held that discounts given to stamp vendors for bulk purchases were trade discounts and not commission, and thus not subject to TDS under section 194H. Similarly, the Delhi High Court in CIT Vs Jai Drinks (P) Ltd. held that payments made to distributors on a principal-to-principal basis as incentives or discounts are not commission liable for TDS.

The Court analyzed the facts that the discounts-target, consistency, and cash discounts-were given as per a pre-communicated scheme to dealers who purchase in bulk and achieve sales targets. These discounts were provided by way of credit notes post-sale and were not part of the invoice price. The dealers independently purchased goods, bore the risk of unsold stock, and were required to make advance payments. The dealers were not agents acting on behalf of the assessee but independent principals. The Court noted that the sale transactions between the assessee and dealers were completed upon delivery, and dealers resold independently, paying GST on their sales.

The AO and CIT(A) had held that since the discounts were linked to sales turnover and provided on achieving sales targets, they were akin to commission payments and thus subject to TDS under section 194H. They relied on the fact that the discounts were passed through credit notes and not reflected in the invoice, interpreting this as commission payments disguised as discounts.

The Court, however, rejected this characterization. It reasoned that the essential element for a payment to be commission under section 194H is that the payment must be for services rendered by a person acting on behalf of another, i.e., an agency relationship. Since the dealers purchased and sold independently, bore commercial risks, and there was no evidence that they acted as agents, the discounts were trade discounts and not commission. The Court emphasized that the agreements between the assessee and dealers clearly established a principal-to-principal relationship, with no adverse findings against the terms of these agreements.

The Court also considered the submissions of the revenue that the discounts were marketing incentives not passing on to end customers and thus not genuine discounts. However, the Court found no evidence or material to support the claim that the discounts were commission payments or that the dealers were acting as agents. The Court noted the absence of any investigation into the dealers' treatment of such discounts as commission income or business income, and no adverse remarks on the agreements were made by the AO.

In application of law to facts, the Court held that the discounts were commercial incentives or trade discounts given in the ordinary course of business to dealers purchasing in bulk, and not payments for services rendered on behalf of the assessee. Therefore, the provisions of section 194H and consequent disallowance under section 40(a)(ia) did not apply.

The Court also distinguished the revenue's reliance on the Mumbai Tribunal decision in SKOL Breweries Ltd. Vs ACIT, noting that in that case, the assessee failed to produce any scheme or documentary evidence for the benefits given, whereas in the present case, the assessee had furnished detailed agreements and scheme documents. Thus, the observations in SKOL Breweries were obiter and not binding here.

Significant holdings include the following verbatim excerpts:

"On careful perusal of the definition of 'commission or brokerage' as given in Explanation to section 194H, we find that to bring any payment within the Explanation, the payment received or receivable, directly or indirectly, is 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... So there must be an element of agency is to be there in case of all services or transactions contemplated by Explanation (i) to section 194H."

"The relationship of the assessee with its dealers were based on agreement that is of principal to principal (P2P) basis and not that of agent... No adverse remark on various terms and conditions of distributor agreement is made by assessing officer."

"Discount given to Stamp Vendors for purchasing stamp in bulk quantity was in the nature of cash discount in transaction of sale, and therefore, section 194H has no application to that transaction."

"The transaction between the assessee and dealer must be regarded as transaction between principal and principal and not as between principal and agent."

The Court concluded that the discounts provided by the assessee to its dealers were trade discounts given on a principal-to-principal basis and not commission payments. Consequently, the non-deduction of TDS under section 194H did not attract disallowance under section 40(a)(ia). The appeal was allowed, setting aside the disallowance of Rs. 55.18 crores made by the AO and upheld by the CIT(A).