TMI Blog2011 (10) TMI 644X X X X Extracts X X X X X X X X Extracts X X X X ..... he Act. 3. Regarding first three grounds, the ld. D/R has placed reliance on the order of the AO. However, regarding disallowance deleted by ld. CIT (A), ld. D/R has stated that ld. CIT (A) was not correct in deleting the disallowance as there is a direct relation between the principal and agent as assessee is agent of BSNL. Therefore, provisions of section 40(a)(ia) is clearly attracted on the amount of commission earned by assessee from BSNL, and assessee has further got work done from various to whom the commission earned by assessee has been shared. Therefore, on that amount assessee failed to deduct TDS and AO was correct in making addition in view of provisions of section 40(a)(ia) of the Act. Relevant portion of the assessment order was read also by ld. D/R. 4. On the other hand, the ld. Counsel of the assessee placed reliance on the order of ld. CIT (A). Further, the relation between principal BSNL and assessee was explained and it was submitted that it is not disputed that assessee is an agent of BSNL. BSNL has paid commission @ 5% and on which TDS has been deducted by BSNL and there is no dispute. It is further submitted that there were two options left with the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... count. Hence, there was a difference of about 0.7% of the sales. v) As per the notes on account attached to the Audit Report (Form No. 3CB), the assessee had not maintained any salary register and the vouchers of misc. expenses. vi) The assessee had employed a very large number of employees, which appeared to be very high as compared to the number of employees, normally required in view of the nature of assessee s business. The expenditure claimed on salary was unreasonably high and the genuineness of the same and employment of such large number of employees was also doubtful, in the absence of any independent clinching evidence. 8. Therefore, the AO proposed to reject the books of account u/s 145(3) of the I.T. Act. In response, the assessee filed reply vide letter dated 14/12/2009. However, the AO did not find that reply acceptable and hence, the AO rejected the assessee s books of account. 9. Further, as per discussion contained in paras 4.1 to 4.4 of the assessment order, the AO noted that on an average, the assessee had allowed a commission of 4% to the retailers. The AO further noted that, however, as per the franchiseeship agreement dated 21/03/2005 filed by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation has been made in respect to the expenditure incurred by the assessee. Findings of ld. CIT (A) have been recorded in para 3.3.1 to 3.3.2 at pages 11 to 14 of his order are as under :- 3.3.1. I have carefully considered the facts of the case and submissions of Ld. AR. I have also carefully gone through the details / documents filed by the Ld. AR in support of this ground of appeal. However, on perusal of the same, I find that there is no dispute regarding the fact that most of the sale of the recharge coupons etc. is made by the assessee in cash and also that the complete address / details of the retailers are not maintained by the assessee. In this respect, it is also noted that the appellant has made the sale of the recharge coupons etc. to the retailers at a price, which was lower than the MRP thereof, after passing on a part of his commission to the retailers. However, appellant s claim in that regard relating to the benefit given to the retailers, as to how much of his commission was actually passed on to the retailers, is not fully verifiable in the absence of complete details/addresses of the retailers. Therefore, the complete verification of the entire sales ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iod from 01/04/2006 to 12/11/2006) and 5% (from 13/11/2006 to 31/03/2007), which the assessee was obliged to necessarily pass on to the retailers, as per the aforesaid agreements with BSNL. Therefore, the appellant was required to submit details of sales made to the retailers for the period 01/04/2006 to 12/11/2006 and for the period 13/11/2006 to 31/03/2007. From the details filed, it is noted that the appellant had made sales of ₹ 16,86,91,274/-, during the period from 01/04/2006 to 12/11/2006, with respect to which a minimum commission of 3% was necessarily to be allowed t the retailers, and had made sales of ₹ 12,79,96,239/-, during the period from 13/11/2006 to 31/03/2007, wits respect to which a minimum commission of 5% was necessarily to be allowed to the retailers. Further, it is noted that therefore, even if the appellant had allowed only the minimum commission of 3% and 5%, as the case may be, the average commission payment by the appellant to the retailers would work out to 3.86% of the entire sales for the F.Y. 2006-07. However, as mentioned before, it is not verifiable from the records as to whether the appellant passed on any benefit, over and above the af ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat will meet the ends of justice. We order accordingly. In this way, the ground of the department is rejected and the only ground taken by assessee in its cross objection is allowed in part. 12. Regarding disallowance of ₹ 10,00,000/- deleted by ld. CIT (A), the facts noted by ld. CIT (A) in his order in para 4.1 are that assessee derives income from franchiseeship of BSNL from his three branches located at Jaisalmer, Sanganer (Jaipur) and Jodhapur . The Ao has analyzed the comparative GP and NP rates of the said three branches as noted in para 5.1 of the assessment order From that analysis, the noted that there was large difference between the GP rate. NP rate and indirect expenses of those branches On query, the assessee filed the reply vide letter dated 22.12.2009 which has been reproduced by the AO in para 5.2 of his order Further, the AO compared the case of the assessee with the case of another assessee i.e. M/s Sushil Company of Sikar, which had declared better NP rate of 1.18% as compared to the NP rate of 0.72% declared by the assessee, and sought assesses expiation in that regard. The assessee s reply has been noted by the AO in para 5.3 of the assessment orde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e ld. CIT (A) have been discussed in para 4.2 at pages 15 to 18 of the order of ld. CIT (A). Thereafter the ld. CIT (A) found that addition made by AO is not correct. Accordingly the addition was deleted. Findings of ld. CIT (A) have been recorded in para 4.3 at pages 18 and 19 are as under :- 4.3. I have carefully considered the facts of the case and submissions of Ld. AR. However, on perusal of the relevant records, I find that the Ld. AO has made the impugned disallowance on the basis of his general observations. In this regard, it is noted that the Ld. AO has made a comparative analysis of the GP and NP rates and the NP / GP ratio of the appellant s three branches at Jodhpur, Jaipur and Jaisalmer and found variations therein. Further, Ld. AO has compared the NP rates and some of the expenses claimed in the P L A/c, as declared by the assessee and M/s Sushil Company, Sikar (comparable case) and found that the assessee had declared lower NP rate as compared to the NP rate declared by M/s Sushil Company and also that some of the expenses claimed in the P L Account by the assessee were comparatively higher than the corresponding figures of those expenses shown by M/s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nistrative office of all the business entities and all the branches. it was explained that thus, there were many expenses which could not be separated, but a chart was prepared to consolidate such expenses as far as it was possible. It was submitted that from the said chart it was clear that there was actually a nominal profit in the head office and, as such, there was no loss in the head office. It was also explained that in electronic goods, such as, TV, Fridge, Wishing Machines, Mobile Handsets etc., there was great competition in the market and the margins were very low. It was also pointed out that due to that fact and on account of loss, some old concerns of Sikar discontinued their business, such as M/s Kalpana Electronics and M/s K.B. Electronics, Station Road, Sikar. However, the AC did not fird that explanation acceptable. The AO, as per discussion contained in paras 6.3 to 6.5 of the assessment order, was of the view that the trading loss declared by the assessee was not genuine. In this regard, the AC made a comparative analysis of the GP and NP rates declared by the assessee from A.Y. 2002-03 to 2007-08, and observed that till the A.Y.2002-03, when the assessee had onl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7-08 being not traceable, results of A.Y.2008-09 are considered), net profit from electronics/electrical business is estimated @ 1% of the gross sales of ₹ 1,78,53,646/- which comes to ₹ 1,78,536/- as against declared loss of ₹ 15,21,301/-. This results in addition of ₹ 16,99,837/-. 15. Detailed written submissions were filed before ld. CIT (A) which has been tabulated in para 5.2 at pages 21 to 24 of his order and after considering the submissions, the ld. CIT (A) allowed this issue in favour of the assessee giving his finding in para 5.3 at pages 24 and 25 which are as under :- 5.3. I have carefully considered the facts of the case and submissions of Ld. AR. However, on perusal of the relevant material available on records, I find that the Ld. AO has made the impugned addition merely on the ground that the GP rate and NP rates were decreasing in the appellant s business of electronics and electricals at Sikar, from A.Y. 2003-04 to A.Y. 2007-08 and further on the basis of the suspicion that, therefore, the assessee was declaring loss from his well established business of electronics I electricals, to set off that loss against the windfall t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... DS certificate in Form No.16A, the BSNL had paid commission to the assessee and had deducted tax at source thereon @ 5.61% of the payment. Further, as per the said agreement, the assessee franchisee was to pass on a part of that commission to the retailers, In this regard, the AO observed that the assessee did not account for the aforesaid commission from BSNL, as commission receipts, but deducted the entire amount of commission from the purchases and, accordingly, the assessee declared the net purchases after deducting the BSNL commission received of ₹ 1,83,67,798/- The AO also observed that the assessee passed on a fixed part of that commission received by him to his retailers, but again, the assessee did not account for the paid commission (to the retailers) separately and, instead, accounted the sales (to the retailers) at reduced rates, without specifically, mentioning the commission amount in each sales voucher. Therefore, the AO required the assessee to file payee-wise details of commission paid to the retailers. However, the assessee; vide letter dated 14/12/2009, stated that his trade practice was to sell the goods below net rates and, therefore, he had not paid any ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and therefore, the margin of profit in the hands of assessee and the retailers was not profit in the customary usual sense, but was of the nature of commission or brokerage in terms of the provisions of S.194-H of the Act. Therefore, in the absence of the details of the commission or discount, exceeding ₹ 2,500/-, paid to the retailers by the assessee, the AO held that the entire such commission/brokerage of ₹ 1,22,70,634/- paid by the assessee to the retailers was not allowable in terms of the provisions of S. 40(a)(ia) of the I.T. Act. However, taking note of the fact that the AO had already disallowed an amount of ₹ 30,87,080/-, treating the said amount of commission/ brokerage as not genuine (as per para 4.4 of the assessment order), the AO restricted the disallowance u/s 40(a)(i) of the I.T. Act to ₹ 91,83,554/- (Rs.1,22,70,634 - ₹ 30,87,080/-), which is in dispute in this ground of appeal. 19. Detailed submissions were filed before the ld. CIT (A) which has been tabulated in the order of ld. CIT (A) in para 6.2 at pages 27 to32. The explanation submitted by ld. A/R is detailed one and explanatory. Therefore, it will be useful to reproduce her ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch services. Goods are sold or services are provided directly to the customers and agents receive commission for booking orders. They neither purchase nor sale goods in their names. The property in goods passes directly in favour of the customers from the principals. In this case, the assessee s own capital and funds were involved in doing the business. He was his own master as far as his business was concerned. Therefore, the discount given out of sale value cannot be called commission. The assessee was actual buyer and seller of goods. 4. It is further emphasized that it is the nature of transaction which is determinative factor and not the nomenclature. Since, in the present case, the assessee purchased the goods from the BSNL, therefore, discount given by them under the nomenclature of commission will not make the assessee an agent of BSNL. In support of the above, we are also enclosing herewith the copies of agreement entered into between the assessee and BSNL dated 21/03/2005 (which was operative in the period 01/04/2006 to 12/11/2006) and agreement dated 13/11/2006 (which was operative for the period 13/11/2006 to 31/03/2007). Reading of various clauses o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re was no relationship of principal and agent between BSNL and the assessee. 5. The assessee was getting discount on its purchases of Cash Card and SIM cards from BSNL under the nomenclature of commission. The BSNL was deduction tax on this payment u/s 194H and the assessee was claiming the same in his return of income. But there was no relationship of principal and agent between the assessee and BSNL. Therefore the assessee had reduced the amount of commission received from BSNL from purchases of the assessee. Kindly see the copy of Profit and Loss account of the assessee where the commission received from BSNL ₹ 1,83,67,798/- has been reduced from the figure of purchases for the year. This fact was acknowledged by the learned AO and he has reported this fact in the assessment order para 7.1. 6. Since BSNL was making payment to the assessee under the nomenclature of Commission and was making TDS thereon, there was no option left with the assessee to account for the same under the same head of account, so that the books of BSNL and assessee could tally. However, this fact alone is not sufficient to prove that the assessee was an agent of BSNL. 7. It is fur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ket - price of prepaid cellular connection and recharge coupons, such margin can not be termed as commission attracting deduction of tax at source under section 194H. Above two decisions fully define the relationship between Cellular Company (BSNL) and Franchisee (assessee in this case). As per above decisions there existed no relationship of principal and agent between these two parties. 3) AHMEDABAD STAMP VENDORS ASSOCIATION vs. UNION OF INDIA 176 CTR (Guj) 193 TDS - Under S. 194H - Discount allowed to licensed stamp vendors - Does not fall within the expression commission or brokerage under S. 194H - Stamp Vendors are required to purchase the stamp papers from Government on payment of price less discount on principal to principal basis and there is no contract of agency at any point of time - Liability of the stamp vendor to pay the price less discount is not dependent or contingent upon sale of stamp paper by the vendor - Stringency of the restrictions claimed in the Gujarat Stamps Supply Sales Rules is not account of the fact that the ownership over the stamp papers is not transferred to the licensed vendors on delivery but it is on account of the sen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... een acknowledged by the learned AO in the assessment order Para 7.1. In support of this the assessee is also filing sample copies of purchase and sales vouchers of various branches of the assessee. 4. The learned AO was insisting to give the details of commission/discount exceeding ₹ 2,500/- allowed to the retailers. Since no such discount or commission was given to them, no details could be provided. The assessee vide letter dated 14/12/2009 informed the AO as under: Our trade practice is to sale the goods below MRP at net rates. We have not paid any commission or discount on BSNL coupons/products, hence no TDS was deducted/applicable . 5. At the cost of repetition it is submitted that the relationship between the assessee and the retailers was not that of principal and agents and they were dealing on principal to principal basis, in view of following facts: a) There was no oral or written agreement between assessee and retailers. b) The assessee had no control over conduct of business by the retailers. c) The property in goods immediately passed on to retailers on sale of goods. d) The assessee sold goods net of discounts a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... invoking provisions of section 194H and thereafter making addition in view of provisions of section 40(a)(ia) of the Act. 21. On the other hand, the ld. A/R placed reliance on the order of ld. CIT (A). Further, attention of the Bench was drawn on written submissions placed on record. 22. We have considered the rival submissions and have perused the orders of the authorities below. Written submissions filed by ld. Counsel of the assessee are similar to the written submissions filed before ld. CIT (A). We have already reproduced the written submissions filed before ld. CIT (A) somewhere above in this order, therefore, there is no need to mention the arguments of ld. A/R in detail here once again. In fact, the assessee is an independent businessman and not an agent of BSNL but he has purchased SIM Card and Recharge Coupon from BSNL against full payment of price of the same to BSNL. In this way it can not be termed that the assessee is an Agent of BSNL. However, there is an agency agreement with BSNL and in this agreement it has been referred to as Franchisee, it means that assessee is not an Agent of BSNL. By purchasing SIM Card and Recharge Coupon, the assessee is doing servic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... view has been taken by Hon ble Gujarat High Court. It is also a matter of fact that the BSNL itself has changed the nomenclature of this payment from word Commission to discount with effect from 31.5.2008 and copy of this clarification was issued. From this fact, it is amply proved that assessee is not an agent or BSNL but a Franchisee. Thereafter, the assessee after making full payment of SIM Card/Research Coupons had sold the same to the retailers and on the basis of bill issued by assessee the full payment has been charged. There is no word of any discount or commission in the bill issued by the assessee. Therefore, this is not the case of the department that assessee has deputed any sub agents and charging commission from them. It is also seen that the assessee has purchased SIM Card and Discount Coupons and they have become the property of the assessee as assessee is liable for damage/loss of SIM Card and Discount coupons. Therefore, also it cannot be said that assessee was an agent and assessee has engaged further sub agents. All these facts have been considered by ld. CIT (A) and thereafter he has given his findings which are recorded in para 6.3 at pages 32 to 33, are ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... discount to the retailers), yet as the relationship between the appellant and his retailers was that of Principal to Principal, the provisions of S.194-H of the I.T. Act were not applicable, in respect of the aforesaid sale of the BSNL products by the appellant to his retailers. Thus, it is held that as the appellant was not liable to make TDS, in respect of the sale discount given by him to his retailers, the impugned disallowance of ₹ 91,83,554/- made by the Ld. AO u/s 40(a)(ia) of the I.T. Act is not sustainable. Accordingly, the AO is directed to delete the impugned addition and consequently, this ground of appeal is treated as allowed. 23. In view of the above foregoing discussions and in view of the findings of ld. CIT (A), we confirm his order in this respect. 24. Remaining amount of ₹ 6,18,900/-, the facts in this regard are discussed in para 7.1 at page 34 of order of ld. CIT (A) are as under :- 7.1. On perusal of the assessment order, it is seen that the impugned disallowance has been made by the Ld. AO as per discussion contained in para 7.4 of the assessment order. In this regard, it is observed that the AC noticed that the assessee had ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... those expenses. It was argued that thus, the Ld. AO was not justified in making the impugned disallowance u/s 40(a)(ia) of the I.T. Act. Further, Ld. AR submitted, as an alternative argument, that as at the end of the year, no scheme/discount was payable to the dealers, the provisions of S.40(a)(ia) were not applicable. In this regard, Ld. AR placed reliance on the decision of the Hon ble ITAT. Jaipur Bench in the case of JVVNL v/s DCIT, 123 TTJ 858. 26. Thereafter, the ld. CIT (A) deleted the disallowance by giving following finding in para 7.3 as under :- 7.3. I have carefully considered the facts of the case and submissions of Ld. AR. It is observed that the expenses of ₹ 6,18,009/-, in question, have been incurred by the assessee on account of incentive I scheme payments to the retailers/dealers of BSNL products. However, as discussed in detail in para 6.3 above, it has been held that there was a relationship of Principal to Principal between the assessee and the retailer/dealers, and not that of a Principal and an Agent. Therefore, following the same reasoning, it is held that the appellant was not liable to make TDS from the aforesaid payments of S ..... X X X X Extracts X X X X X X X X Extracts X X X X
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