TMI Blog2005 (7) TMI 306X X X X Extracts X X X X X X X X Extracts X X X X ..... roximately 80% of the sales are exempt from sales-tax. Therefore an inference cannot be drawn on 20% of the sales on which sales-tax is charged that the transaction is principal-to-principal basis. Moreover invoices not give any terms and conditions which were so advocated by the Ld. AR as enumerated hereinabove. Moreover the charges of sales tax are different for different transactions under particular Sales Tax Act of a State. Sales-tax can be charged and returns are filed in many States on works contract, consignment sale and even on transfer of goods from head office to branch office. Moreover the sales bill is in the capacity as customer or consignee has not been made clear on the sales bill. Further the payment is to be made on fortnightly basis, as is evident from sales bills. But it has not been brought on record, whether the sales price collected from retailer is send to the assessee after deducting commission or indirectly said to be margin of profit or the distributor has the right to use that money to his advantage or benefit. Whether the distributor have their own warehouses or godowns and sells them as an owner has also not been brought on record. Without bringing on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are fifteen grounds of appeal in each year. Ground Nos. 1, 3 to 9, 11, 12, 14, 15 are not pressed by the appellant. The remaining grounds of appeal are as under: Ground No. 2 The CIT(A) has erred in facts and law in holding that the appellant's transactions with its distributors were subject to deduction of tax at source as 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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... All risks are transferred to the distributor on delivery of the goods. The transaction is one of the sale subject to sales tax. (c) It is totally incorrect to consider the margin earned by the distributor as commission. To 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. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rtant. All the three distributors whose statements were recorded at different places thinks the same way that they 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rly shows that how even 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 expenses. (ii) Vehicle rep ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nts 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 in the case of contract of sale, title of property passes on to the buyer on delivery of g ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r 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 geographical area assigned to them. In fact, the distributors are concerned with the margin (commission) wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ault 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 time of statement that they are receiving the commission at a specific rate per crate and Ld. CIT(A) r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 that the distributors are not independent from the appellant company. 19. The Ld. CIT(A) in para 4.6 of his order distinguished the decision ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 distributors so that nature of transaction is determined in view of provisions of Indian Contract Act and Sale of Goods Act. To the surprise of the bench, it has been categorically denied by t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 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 applicable in the facts and circumstances of the case. There being no agreement or document but from the circumstances and documents available, we are of the considered view that in the case of the assessee following proposition are evident and irrefutable that:- (i) Dist ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... laims 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 an independent principal. Secondly, if the distribution of goods by distributor would have been independent sales by independent principal, then how the assessee-company would claim depreciation on the vehicles, because for making a claim of depreciation in respect of an asset, not only the asset should be owned by the assessee but it should be used by assessee for its own business. Thu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion 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 account and the claim of the assessee bank, that there is no accrual or arising of the income in such cases. Hon'ble Justice Sabyasachi Mukharji and concurred by Hon'ble Justice Ranganath Misra, have held that: After debiting the debtor's account and not reversing that entry, but taking the interest merely in suspense account cannot be such evidence to show that no real income has accrued to the assessee or been treated as such by the assessee. Thus by own admission of the assessee bank, the income has accrued or arisen in the mercantile system of accounting . 34. In the present case the assessee is maintaining mercantile system of accounting ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ration. 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, is that a repealed section can always be relied upon, for interpreting the new provisions, if the old section is in pari materia and having the same sum and substance. Thus, the issue gets clarified in view of the old section, that the distributor's margin is nothing but a commission and is liable for tax deduction at source. 38. Regarding applicability of section 194H, which is the main issue in these appeals, the same has to be analysed and synthesized. The provisions of section 194H contained in the Act are as under: 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 com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 section shall apply accordingly. 40. The statement of the distributors that they are given fixed commission cannot be retracted by filing affidavit for which the Assessing Officer had already given sufficient opportunity to the assessee. 41. In the facts and circumstances, we also do not agree with the submission made by the Ld. AR that according to the CBDT Circular No. 275/201/95, dated 29-1-1997 a person responsible to deduct tax cannot be regarded as an assessee in default in respect of payment of any amount if the payee has already paid taxes in respect of such income. In this regard we agree with the findings of the Ld. CIT(A) vide his order in para 4.2(4) which reads as under:- 4. In para 4 of paper book, assessee has drawn attention towards CBDT circular No. 275 which by quoting on ..... X X X X Extracts X X X X X X X X Extracts X X X X
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