Income Tax Appellate Tribunal - Delhi
National Panasonic India (P) Ltd. vs Deputy Commissioner Of Income Tax on 2 February, 2005
Equivalent citations: (2005)94TTJ(DELHI)899
ORDER
Pradeep Parikh, A.M.
1. The assessee is in appeal before us against the order of the learned CIT(A), dt. 28th Jan., 2004, for financial year 2001-02. The assessee is aggrieved against the invoking, the provisions of Sections 194-I and 194H of the IT Act, 1961 (the Act), and thereby confirming the order passed under Section 201/201A(1A) of the Act. We first take up the issue relating to the applicability of Section 194-I.
2. The assessee is a subsidiary of Matsushita Electric Company, Japan, and operates through two divisions, viz., (a) Consumer Product Division and (b) System Product Division. It has twelve branches all over India and also has a network of distributors and dealers. In the course of verification of Form Nos. 26-C and 26-J, the AO, on a sample basis, analyzed the agreement between the assessee and Ankur Roadlines (P) Ltd. (Ankur for short), one of the Clearing and Forwarding Agents (C&F agent for short) of the assessee-company. The findings of the AO were as follows :
(a) Clauses 4 to 12 of the agreement concentrated on the physical space provided to the assessee which, according to the AO, was the main ingredient of the agreement;
(b) As per Clauses 8 and 9 of the agreement, it was not an outright sale to the agent but the property in the goods remained with the assessee;
(c) As per Clause 11 of the agreement, the assessee had free access to the property at all times and had powers to inspect the goods, to make inventory, to take charge of and remove the goods without any hindrance;
(d) Minimum guarantee was fixed to be paid to the C&F agents;
(e) Expenses incurred for certain minor services were reimbursed by the assessee to the C&F agents.
After considering the above aspects, the AO came to the conclusion that the dominant purpose of use of the premises was of storage of goods and that there was a deliberate arrangement to camouflage the transaction and make it look like a transaction of services. The explanation offered by the assessee could not convince the AO. Accordingly, short deduction of tax under Section 194-I was computed at Rs. 4,18,200. Interest under Section 201(1A) was calculated at Rs. 91,204 and thus a total demand of Rs. 5,09,404 was raised.
3. Detailed submissions were made by the assessee before the CIT(A) to highlight that basically, the agreements with the C&F agents were essentially service agreements which were also subject to service tax. The CIT(A) scrutinized all the agreements and concluded that fixed remuneration excluding rent was clearly for C&F services other than storage, i.e., for providing distribution and logistic support. He scrutinized the break-up of the payments made to all the C&F agents and segregated the rent portion from it and directed the AO to calculate the tax thereon at applicable rates.
4. The submissions, of the learned counsel were by and large the same as they were before the lower authorities. In addition, it was contended that predominantly it was an agreement for services and that is why service-tax was levied. It was contended that if there was any violation on account of the C&F agent, it was not that the agent could claim only for storage. He could make the claim for the violation of the overall agreement. Contract of providing warehousing facilities, it was contended, was different from that of C&F services and in respect of which the assessee had already deducted tax at source under Section 194C of the Act.
5. Referring to the details of the various contracts given by the CIT(A) in his order, the learned Departmental Representative fairly conceded that atleast in the case of contract with Ankur Roadlines (P) Ltd. and Ankit Enterprises, Section 194-I may not apply in view of the fact that total rent in each case was Rs. 25,000 only. However, in the remaining cases, Section 194-I would apply since the rent component was separately identifiable. In that sense, it was contended, the CIT(A) was fair to apply the provisions only to the rent component and in cases where the payee was already assessed, only interest was levied.
6. We have duly considered the rival contentions and the material on record. Section 194-I of the Act mandates a person, other than an individual or an Hindu undivided family (HUF), paying rent to a resident to deduct tax at source at the time of credit or payment, whichever, is earlier. Clause (i) of the Explanation to Section 194-I gives the meaning of "rent" to be a payment under any lease, sub-lease, tenancy or any other agreement or arrangement for the use of any land or any building (including factory building), together with furniture, fittings and the land appurtenant thereto, whether or not such building is owned by the payee, Thus, "rent" for the purposes of Section 194-I, is essentially a payment for the use of any land or building. In other words, the agreement or arrangement which gives rise to the payment of rent, must necessarily be an agreement or arrangement predominantly for the use of land or building. However, where the agreement is not predominantly for the use of land or building, but for something else, then payment under that agreement will not constitute rent even if that "something else" involves the use of land or building as an integral part of or incidental to the predominant objective of the agreement. Let us consider the facts of the case before us in the light of this basic concept of "rent".
7. The assessee has appointed several C&F agents. The appointment of C&F agents is necessitated for a smooth and proper distribution of its goods over a particular area. In other words, C&F agents are a link between the manufacturer and the consumers. It is a part of sales and distribution network of the manufacturer. The manufacturer despatches goods to the C&F agent, who in turn forwards the same to various destinations, either to wholesalers or stockists, for onward movement to retailers and consumers. In short, the essence of this arrangement is that the goods reach their ultimate destination smoothly without any interruption. It is just one of the modes of making available the goods in the market. However, there is a time-gap between the receipt of goods by the C&F agent and their onward despatch, Obviously, the C&F agent has to store these goods during the intervening period. But then, simply because the C&F agent has to hold the goods in the interregnum, the distribution arrangement between the manufacturer and the C&F agent is not converted into an arrangement as may be obtaining between a landlord or tenant, or between a tenant and a sub-tenant. In case of an arrangement which is a part of the distribution network, the payment made by the manufacturer to the C&F agent is for the services rendered by the latter to the former, the services being those of distribution of goods. This also explains as to why service tax is levied on the C&F agents. Merely because the C&F agent stores the goods in the intervening period, the character of the payment made by the manufacturer to the agent does not undergo any change so as to call it rent either under general law or for the purposes of Section 194-I of the Act. Further, this being a contract for carrying out a work between the assessee and the agent, the assessee has deducted tax at source under Section 194C of the Act. The fact that Section 194C will apply to the impugned payment is clarified by the Board in its Circular No. 715, dt. 8th Aug., 1995. The Board has also clarified by its Circular No. 720, dt. 30th Aug., 1995, that each section under Chapter XVII deals with a particular kind of payment to the exclusion of all other sections in the chapter. Therefore, a payment is liable for tax deduction only under one section. Again, obviously the total payment received by the agent will also include rent as a part of the total cost, but that does not mean that the arrangement between the assessee and the agent is for the use of land or building. It is merely a component of total cost, the break-up of which was given by the assessee to the authorities. But, it does not attract the provisions of Section 194-I and, hence, the CIT(A) was not justified in holding it otherwise. In the final analysis, we hold that Section 194-I does not apply at all to the payments made by the assessee to its C&F agents.
8. We now take up the issue relating to Section 194H of the Act. It was observed by the AO that in order to boost its sales, the assessee had offered huge commission to its distributors and dealers in the form of incentives and discounts by using different names. They were : (a) trade discount, (b) regional sales promotion, (c) key dealer incentive, (d) fast track bonus, (e) trade scheme (f) sales promotion, (g) sales promotion (price buffer), (h) special discount (institutional sales), and (i) market alterations. All these put together aggregated to Rs. 28,26,33,417. The AO noted the absence of written agreement between the assessee and distributors/dealers and was of the view that the assessee had tried to camouflage the real transaction which was in the nature of principal to agent by giving it a colour of principal to principal transaction. Therefore, he treated the entire amount of Rs. 28.26 crores as commission and held that assessee was liable to deduct tax therefrom under Section 194H of the Act. Not having done so, total demand of Rs. 3,31,52,900, inclusive of interest, was raised against the assessee in this respect.
9. The main contention of the assessee before the CIT(A) was that the relationship between the assessee and its distributors/dealers was on principal-to-principal basis and not that of a principal and agent. The CIT(A) agreed with this contention of the assessee. However, after analyzing each of the incentive/discount and having regard to the meaning of commission given in Section 194H, the CIT(A) held that except trade discount, all other items were meant for services rendered in the course of buying or selling of goods. They were for sales promotion and marketing services, and hence were to be treated as commission for the purposes of Section 194H of the Act.
10. The learned counsel for the assessee analyzed the expression "........for any services in the course of buying or selling of goods ......." appearing in Clause (i) of the Explanation to Section 194H, and in particular, the expression "in the course of." According to him, the latter expression meant that it is not during initiation or culmination. In this connection, he referred to each of the items of the various schemes to show that none of the credits given to the distributors/dealers could be said to be in the course of buying or selling of goods. It was argued that the schemes may be for sales promotion, but certainly the credits were not earned in the course of buying or selling of goods. The learned counsel relied on several judgments in support of his arguments, to which we shall advert to later, as and when necessary. Finally, it was pointed out that the assessee had acted in a bona fide manner insofar as that since 1994, no action was taken by the Department till the year under consideration. Therefore, in that sense, according to the learned counsel, the assessee had a reasonable cause not to deduct tax under Section 194H of the Act.
11. The learned Departmental Representative, by and large, relied on the order of the CIT(A) and contended that buying and selling were continuous activities. They were not one-time events and hence the incentives earned took the colour of commission as was defined in the Act. As regards reasonable cause, it was submitted that each year of assessment was a separate unit of assessment and hence action could be taken even if in earlier years no such action was taken.
12. We have duly considered the rival contentions and the material on record. Clause (i) of the Explanation to Section 194H provides for an inclusive definition of the term "commission". It envisages three types of payments which can be regarded as "commission". They are :
(a) payment received or receivable, directly or indirectly, by a person acting on behalf of another person for services rendered (not being professional services);
(b) payment received or receivable, directly or indirectly, by a person for any services in the course of buying or selling of goods;
(c) payment received or receivable, directly or indirectly, by a person in relation to any transaction relating to any asset, valuable article or thing, not being securities.
Out of the above three types of payments, we are not concerned with the third type of payment. As regards the first type of payment, the CIT(A) has accepted that the arrangement of distributorship/dealership is on principal-to-principal basis and not on principal-agent basis. This conclusion reached by the CIT(A) is not under challenge before us. Since the first type of payment envisages a person acting on behalf of another person, it will not apply to the facts of the present case as the distributors/dealers are held not to be acting on behalf of the assessee. Therefore, we are left with the second type of payment only and on which the CIT(A) has based his conclusion.
13. As per the Law Lexicon by P. Ramanatha Aiyar (1997 Edn.), the word "course" conveys the idea of a gradual and continuous flow, an advance, a journey, a passage or progress from one place to another. Etymologically, it means and implies motion, a forward movement. "Commission", on the other hand, as per the same Law lexicon means, a compensation to a factor or other agent for services to be rendered in making a sale or otherwise. It is a sum allowed as compensation to a servant, factor or agent who manages the affairs of others, in recompense for his services. It is an allowance, recompense or reward made to agents, factors, brokers and others for effecting sales or carrying out business transactions. It is generally calculated as a certain percentage on the amount of transactions or on the profit to the principal.
14. Combining the two meanings together, what emerges is that as a person goes on selling the goods, or as he advances or moves ahead in selling the goods, he goes on accumulating his earnings in the form of commission. As a matter of fact, going by the meaning given in the Law Lexicon, as also going by what is commonly perceived, generally a person earning commission would be selling goods not on his own account but on behalf of another, commonly known as the principal. If this meaning or situation is to be adopted, then one is tempted to rearrange the meaning of the word "commission" given in Section 194H of the Act. In that case, the second type of payment with which we are concerned, referred to in para 12 above will read as follows :
(b) payment received or receivable, directly or indirectly, by a person acting on behalf of another person for any services in the course of buying or selling of goods.
The point we are trying to drive home is that a commission payment, in order to attract the provisions of Section 194H, must have been received by a person who is acting on behalf of another, that is, in other words, he must be acting as an agent of another person. In the instant case, it is not in dispute that the distributorship/dealership arrangement is on principal-to-principal basis and not on principal-agent basis. This is also evident from the sample agreements placed on record (pp. 156 and 164 of paper book I filed by the assessee). Clause 5.1 of the dealership agreement (p. 165 of the paper book) clearly indicates that the dealer will be purchasing the goods from the assessee. Clause 7 of the agreement stipulates that the dealer shall pay for the products ordered and accepted by it against delivery. Clause 6.1 of the agreement stipulates that the dealer is free to sell the goods at any price subject to the condition that it shall not be sold at a price beyond the maximum price suggested by the assessee. All these go to indicate that:
(a) the distributor/dealer is not acting as an agent of the assessee;
(b) the distributor/dealer pays for the goods he buys;
(c) the profit of the distributor/dealer depends mainly on the prices at which he is able to sell the products, rather than on the progression of sales which would have been the case if the remuneration of the distributor/dealer would have been in the form of commission.
Broadly speaking, one can of course say that the distributor/dealer is effecting sales on behalf of the assessee and that his profit will depend on the sales he makes. However, in saying so, one is missing the point that if the distributor/dealer were to earn by way of commission, then volume only in terms of quantity would have been important for him. Here, it is not only the volume in terms of quantity that matters for the dealer, but also the price at which he is able to sell the products. Actually, his margin would depend on the price he is able to command in the market. In that sense, he will be working for his own self and not for the assessee, and if he is not working for the assessee, there is no question of any commission payable to the dealer.
15. Further, let us assume that a person who is selling on commission basis, stops selling the goods. In that case, the sales of the person on whose behalf he was to sell will suffer. On the other hand, in the instant case, the dealer having purchased the goods from the assessee and having paid for it, it makes no difference to the assessee if the dealer keeps on holding the goods instead of selling them. There is no monetary loss to the assessee. The loss is to the dealer till he does not sell the goods.
16. In the light of the above discussion, then what are the incentives which the dealer gets and which are termed as commission by the lower authorities ? Well, in our considered view, they are nothing more than incentives or motivators, which may drive the dealer to achieve certain targets, but certainly they cannot be called commission. They are various sales promotion schemes, which keep on coming and going. They may be area-specific, class of customer-specific, period-specific, etc. They are never permanent and, therefore, incentives earned from such schemes cannot be said to have been earned in the course of buying and selling the goods. The fact that these schemes do not form part of the agreement, itself suggests that they are not permanent and the profits of the dealer do not predominantly depend on these schemes. There may be a period during which no scheme may be in operation at all. But even in absence of a scheme, the course of buying and selling goes on. The quantum of incentives earned by a dealer may be dependant on the quantum of certain sales, but the normal buying and selling goes on irrespective of the schemes and, hence, these incentives cannot be termed as commission in the normal course of buying and selling the goods as envisaged in Section 194H of the Act. Accordingly, in the light of the foregoing discussion, we hold that the assessee had not made any commission payment to any person and hence there was no question of deducting any tax at source under Section 194H of the Act.
17. In the result, the appeal of the assessee is allowed.