TMI Blog2011 (12) TMI 84X X X X Extracts X X X X X X X X Extracts X X X X ..... in favor of assessee. - IT Appeal NO. 434 (DELHI) of 2011 - - - Dated:- 16-12-2011 - A. D. Jain And Shamim Yahya, JJ. ORDER A. D. Jain, Judicial Member This is assessee's appeal for assessment year 2006-07 against the order dated 10.11.2010 passed by the Commissioner of Income Tax (Appeals) XII, New Delhi. The following grounds have been raised:- 1. That on the facts and circumstances of the case and in law the CIT(A) erred in confirming disallowance of ₹ 11,78,24,030/- out of total disallowance of ₹ 16,80,66,667/- made by the Assessing Officer under section 40(a)(ia), for alleged failure of the appellant to deduct tax at source under section 194H of the Income Tax Act, 1961 ( the Act ). 2. That the CIT(A) erred on facts and in law in not appreciating that there existed no principal-agent relationship between the appellant and the Collection Centres, which is sine qua non for invoking section 194H of the Act. 2.1 That the CIT(A) erred on facts and in law in not appreciating that the amount retained by the Collection Centres was in the nature of discount and not commission. 2.2 Without prejudice that the CIT(A) erred on facts an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... entrepreneurs also; that in accordance with these agreements, the Collection Centres collect samples from patients/customers seeking various laboratory testing services; that their request forms to-be sent along with the samples to be tested are filled up; that the Centres forward the samples to specialized testing laboratories like the assessee; that the Centres may avail the services of any such specialized testing laboratory, including the assessee; that it is only if the patient/customer insists that the required test be got done from the assessee, that a Centre forwards the sample of that patient/customer to the assessee for testing it; that the Centres issue their own bills/invoices to the patients/customers; that the Centres collect the fees for the tests conducted and issue receipts for the fees collected; that the Collection Centre acts as an Authorized Collector for collecting samples and avails the professional services of the laboratories like the assessee with respect to testing of samples and issuance of necessary reports; that in cases where the tests are done by the assessee, the assessee raises periodical invoices on the Collection Centre; that the Collection Centr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ilment is to ensure that the samples reach the assessee laboratory in the requisite temperature, under prescribed conditions, so as to assure error free testing; that the Authorities below have erred in observing that the assessee had imposed any geographical restrictions on the Collection Centres; that rather, the Collection Centres are free to engage the services of other laboratories; that the restriction on the Collection Centres is against collaborating with the competitors of the assessee, so as to prevent divulging the specific and confidential know-how of the assessee to the competitors; that such a restriction is necessary to preserve and save the assessee's business interest; that even otherwise, such a restriction does not result in any Principal - Agent relationship between the assessee and the Collection Centre; that since the assessee does not pay or gift any amount to the account of the Collection Centre either directly or indirectly, Section 194H of the Act does not apply; that there was no amount of discount/commission paid by the assessee and/or debited in the accounts of the assessee and therefore, any obligation to deduct tax at source u/s 194H of the Act ev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... x is not deducted on commission paid for carrying out work, it is mandatory that such commission be not deducted. The ld. DR has sought to place reliance on ACIT, Circle 57, Kolkata v. Bharati Cellular , 105 ITD 129 (Kolkata) and Hindustan Coco Cola Beverages Pvt. Ltd. v ITO, TDS, Range 7 , 97 ITD 105(JP). In Bharati Cellular (supra), it was held, inter alia, that the assessee was liable to deduction of tax at source u/s 194H of the I. T. Act on commission paid to its franchisees and the AO was justified in treating the assessee as a defaulter and then computing TDS and interest thereon and the ld. CIT(A) was not justified in vacating the AO's order. 6. In Hindustan Coco Cola Beverages (supra), it was held, inter alia, that where the relationship between the assessee company and the distributor was on a Principal and Agent basis, the assessee was liable to deduct tax on commission. 7. We have heard the parties and have perused the material on record. The issue before us is the interpretation of section 194H of the I.T. Act - as to whether it is applicable to the facts of the present case or not. At the outset, it would be appropriate to reproduce the provisions of se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ause (h) of section 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 provisions of this section shall apply accordingly. 8. Thus, Section 194H, brought in from 1.6.2001, provides that any person, other than an individual or a Hindu Undivided Family, responsible for paying commission or brokerage to a resident, shall deduct tax at source; and that the tax shall be deducted at the time of credit of such income to the account of the payee or at the time of payment of such income or by issue of a cheque or draft or by any other mode, whichever is earlier. To fall within the provisions of section 194H, the payment received or receivable, directly or indirectly, is to be by a person acting on behalf of another person (i) for services rendered, not being professional services, or (ii) for any services in the course of buying or selling of goods or (iii) in relation to any transaction relating to any ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shown that the rates charged by the Collection Centre from its customers are not decided by the Collection Centre, but by the assessee. It has not been shown that the Collection Centre is under any obligation to forward the samples for testing only and only by the assessee and not by other laboratories as well. The set- ups of the Collection Centres are also entirely different from that of the assessee. Their expenditure has also not been shown to be interlacing with that of the assessee. The staff of the two and also distinct and separate. The accounts are not either inter-mixed or inter-twined. On the other hand, there exists a privity of contract between the Collection Centres and their customers. Out of the payment made to the assessee, tax is deducted at source for professional services rendered, u/s 194J of the Act. The receipt by the Collection Centres is not established to be on behalf of the assessee. The receipt of the Collection Centres, as such, is the income of the Collection Centres themselves and not that of the assessee. To bring home this point, it is enough to consider that the amount, alleged to have been paid by the assessee to the Collection Centres, has not b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... llection Centres was not treated as the deductible expenditure. 14. The assessee's contention that the Collection Centres have the option to conduct the tests themselves or to out-source their medical services to other laboratories, has been simply brushed aside by the ld. CIT(A) stating it to be of no significance. This, however, to our mind, is not correct. Firstly, this contention has not been disproved. It is borne out from the agreements. Then, if this averment on behalf of the assessee is correct, the element of agency in the relationship between the assessee and the Collection Centres goes away. True, the Collection Centres have to follow the terms of the contract entered into by them with the assessee. However, no violation of the terms of these agreements has been shown. The ld. CIT(A) has concluded that the assessee's contention that the Centres can out-source their services to other laboratories, is factually incorrect. This is based on the recital in the agreement that the Collection Centres cannot collaborate with the competitors, even on the termination of the agreement. The assessee's stand in this regard has been that such a restriction was imposed si ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on behalf of the assessee that all through, i.e., in the past, as well as in the present, the Collection Centres have been and are engaging the services of other laboratories. This has not been disputed. 16. The ld. CIT(A) has also objected that it is not true to contend, as done on behalf of the assessee, that the Collection Centres are free to charge a rate as desired by them from their patients; that the advertisement clearly specifies the rate which is to be charged by the Collection Centres; and that from this, it is clear that the assessee has control over the pricing of the test. 17. In this regard, the contention on behalf of the assessee has been that the findings of the ld. CIT(A) is incorrect. It has been reiterated that the Collection Centres are free to charge the desired rates from the customers/patients. It has been submitted that though in the advertisement attached as Annexure-A to the CIT(A)'s order, the rates have been specified, the Collection Centres charge the rates fixed by the Collection Centres themselves and not at those decided by the assessee; that in certain cases, the Collection Centres have charged over and above the standard price list prov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as to how this acts detrimentally to the assessee. No Principal - Agent relationship stands established by this sole fact. Obviously, since the assessee renders professional services, and that too, professional services by way of medical testing, there is a strict professional conduct which has to be abided by the assessee, the assessee is under a strict obligation. If there is any negligence or deficiency on the part of the assessee, it is the assessee who is answerable. 21. As seen from the above, it is evident that there is no Principal - Agent relationship existing between the assessee and the Collection Centres. The findings of the learned CIT(A) in this regard are, therefore, incorrect and we hold so. 22. Besides the above, it is patent on record that the assessee does not pay or credit any amount to the account of the Collection Centres, either directly or indirectly. That being so, the provisions of section 194H of the Act do not get attracted on this score also. It is obvious that the obligation of deduction of tax at source u/s 194H of the Act comes up only at the time of payment or credit of the amount in the books of account of the payer, whichever is earlier. Her ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a fortnightly basis. The agent receives a pre-agreed commission, which is fixed for the industry as a whole, after deducting tax at source under section 194H of the Act. In that view of the matter, there is no dispute that there is a Principal - Agent relationship between the airline on the one hand and travel agent on the other. 28. In the aforesaid background of facts, the question arose whether the supplementary commission retained by the travel agents was in the nature of 'Commission' for the purposes of section 194H of the Act, on which, tax was required to be withheld, or it was in the nature of discount. 29. In the undisputed position that the approved agent acted vis-a-vis airline in the capacity of an agent, it was held that the supplementary commission received from sale of tickets was no different from the commission normally received by the agent, on which tax was being deducted under section 194H of the. Act. 30. in the present case, however, there is no Principal Agent relationship that subsists between the assessee and the Collection Centres. On the contrary, it is the assessee which renders lab testing services to the Collection Centres, on which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the agent by Doordarshan was 15 per cent of the advertisement charges, collected and remitted the agent which was in the form of commission payable to the agent by Doordarshan. Further, it was found on facts that the advertisement contract entered into between the customer and the agency was for telecasting advertisement on Doordarshan channels. 35. In the present case, on the contrary, the collection center has no authority to bind the assessee in any form. The collection centers, acting in their own right, engage the assessee for lab testing services and do not, in any manner, act as agents of the assessee. That being so, 'Director, Prasar Bharti' (supra), does not come to the aid of the revenue. 36. In Delhi Milk Scheme (supra), the assessee appointed a large number of agents/concessionaires all over Delhi to sell milk/ milk products owned by the assessee. The assessee did not charge any rent for the use of booths from the concessionaires. The milk booths were, in fact, owned by the assessee. The assesee had a right to enter the milk booth and take charge thereof at any time, without assigning any reason or without any intimation to the concessionaires. The u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hich the samples have to be sent for testing. In fact, in certain cases, the collection centers have, as also brought on record before us, charged over and above the standard price list provided by the assessee to all collection centers, which averment has gone unrebutted. Hence, 'Delhi Milk Scheme' (supra) is also not of any avail to the Department. 40. In Bharti Cellular (supra), the assessee was providing cellular mobile telephone services in specific area through distributors by providing SIM and pre-paid cards at fixed rates below the market price, which were further sold to retailers, who ultimately sold the SIM cards and pre-paid cards to customers. As per the agreement between the assessee and the franchisees, the rights, title, ownership and property rights in the pre-paid cards, at all times, vested with the assessee. The franchisee's price and payment thereof was decided by the assessee itself, which showed that the difference between price charged by the assessee and that charged by the franchisee was commission and not discount. 41. In the background of the aforesaid facts, taking into account that there was no transfer of title in the property (SIM ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to these differences on facts also, 'Hindustan Coca Cola Beverages' (supra) has no parity herewith. 46. In view of the above discussion, we find the grievance of the assessee to be perfectly justified. We hold that (i) there is no Principal-Agent relationship between the assessee and the Collection Centres and that being so, the provisions of section 194H of the Act have been wrongly invoked; (ii) The provisions of section 194H of the Act could, even otherwise, not have been met, since no payment has been shown to have been made by the assessee to the Collection Centres; (iii) The payment made to the assessee by the collection Centres was at the rates agreed to inter se between them; and (iv) The ld. CIT(A) erred in confirming the 'disallowance of ₹ 11,78,24,030 made u/s 40(a)(ia) of the Act for the alleged failure of TDS by the assessee u/s 194H of the Act. 47. Ground No. 3 states that the ld. CIT(A) erred in not adjudicating the challenge of the assessee to the AO's findings that the discount offered by the assessee to the Collection Centres was in the nature of payment for work, on which, tax was deductible u/s 194C of the Act. 48. Since, the clai ..... 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