Income Tax Appellate Tribunal - Cuttack
Neelachal Ispat Nigam Ltd, Bhubaneswar vs Assessee on 10 June, 2013
1
ITA Nos. 295 to 298/CTK/2013 Neelachal
Ispat Nigam Ltd. AY: 2006-07 - 2009-10
IN THE INCOME TAX APPELLATE TRIBUNAL: CUTTACK BENCH: CUTTTACK
(Before Shri K. K. Gupta, AM & Shri George Mathan, JM)
ITA Nos. 295 to 298/CTK/2013
Assessment Years: 2006-07 to & 2009-10
Neelachal Ispat Nigam Ltd. Vs. Asstt. Commissioner of Income-tax,
(PAN: AAACN9433B) (TDS)-II, Bhubaneswar
(Appellant) (Respondent)
Date of hearing: 10th June, 2013
Date of pronouncement: 10th June, 2013
Assessee by: S/Shri P. S. Panda & K. Agarwalla, ARs
Revenue by: Shri N. K. Neb, Sr. DR
ORDER
Per Bench:
These are appeals filed by the assessee against the order of CIT(A)-I, Bhubaneswar in appeal No. 0019/11-12 dated 21.05.2012 passed u/s. 201(1)/201(1A) of the Income Tax Act, 1961 (hereinafter referred to as the Act).
2. S/Shri P. S. Panda and K. Agarwalla, ARs appeared for the assessee and Shri N. K. Neb appeared for the revenue.
3. There is a delay of 277 days for which the assessee has filed necessary affidavit for condonation of delay. The Ld. DR has not objected to the condonation of delay. Consequently, delay in filing the appeals stands condoned and the appeals are disposed of on merits.
4. It was the submission of the Ld. AR that the assessee is a company incorporated under the Companies Act, 1956 and is in the business of production and sale of pig iron, billets, wire rods, granulated slag and other products. M/s. MMTC is the promoter of the assessee company. There was an agreement between MMTC and the assessee in 1999 by which MMTC was made the sole selling agent of the products of the assessee. It was the submission that the MMTC purchased the products of the assessee and on such purchases excise duty and sale tax had been paid. It was the further submission that MMTC sold the same to third parties for 2 ITA Nos. 295 to 298/CTK/2013 Neelachal Ispat Nigam Ltd. AY: 2006-07 - 2009-10 which also sales tax have been paid. It was the submission that the sale by MMTC to third parties was at a price which was fixed by the Steering Committee which consists of persons of both the assessee and the MMTC. It was the submission that MMTC raised debit notes for the trade margins at 3%. It was the submission that this was a case where MMTC was paid a guaranteed profit on the total sales made by MMTC of the products of the assessee. It was the submission that this trade margin of 3% had been treated by the AO as commission and on the ground that the assessee had not deducted TDS u/s. 194H of the Act, had treated the assessee as an assessee in default and had levied tax u/s. 201(1) and interest u/s. 201(1A) of the Act. It was the submission that though in the agreement it is mentioned that MMTC was the sole selling agent of the assessee, no commission per se was paid by the assessee to MMTC. It was the submission that as per the agreement, the assessee did not do any sale to any person other than through MMTC. It was the submission that this was because MMTC had provided a corporate guarantee in respect of the assessee. It was the submission that the arrangement of this sole and exclusive agent of the assessee being MMTC was only till such time the corporate guarantee provided by MMTC was discharged to the satisfaction of MMTC. It was the submission that in effect MMTC kept control over the assessee in respect of its sales so that MMTC would be protected in respect of the corporate guarantee provided by MMTC. It was the submission that the sales of the assessee's products through MMTC were treated as part of the turnover of MMTC. It was the submission that the AO treated the 3% guarantee profit more so the trade margin as commission on the ground that MMTC was the sole and exclusive agent of the assessee as also on the ground that MMTC could not sell the assessee's products at a price of its choice because if MMTC sold the product of the assessee at a higher rate than the market rate in order to discharge its corporate guarantee the market would collapse thereby affecting the assessee company. It was the further submission that MMTC was also desirous of discharging its corporate guarantee at the earliest and consequently, did not permit the assessee from fixing its price of its materials as if the assessee tried to under cut the competition it could affect the profitability of the assessee company thereby making MMTC bare the brunt of the corporate guarantee. It was the submission that this was 3 ITA Nos. 295 to 298/CTK/2013 Neelachal Ispat Nigam Ltd. AY: 2006-07 - 2009-10 why Steering Committee was provided in the agreement which consisted of two members being the convenor and the Chairman are being nominated by MMTC and two members nominated by the assessee. It was the submission that in fact the pricing of the products of the assessee company was by the Steering Committee. It was the further submission that the AO and the CIT(A) further was of the view that all promotional materials like the brochures, advertisement was to be paid by the assessee on actual basis which have been incurred by MMTC and consequently, came to the conclusion that the 3% trade margin on the sales made by MMTC was in fact commission paid by the assessee to MMTC. It was the submission that the transaction between the assessee and MMTC clearly showed the levy of excise duty and the payment of sales tax as also the issuance of 'C' forms which evidenced the fact that the transaction between the assessee and MMTC was principal to principal basis. It was the submission that as a transaction between the assessee and MMTC and the transaction between MMTC and third parties both involved the levy of sales tax it could not be said that MMTC was the agent of the assessee to whom the assessee has paid commission. It was the submission that the order of the AO treating the assessee as an assessee in default for the purpose of section 201(1) and 201(1A) of the Act on account of the non-deduction of TDS u/s. 194H of the Act may be cancelled.
5. In reply, the Ld. DR drew our attention to page 6 of the order of AO to submit that the AO had examined the agreement between the assessee and MMTC. It was the further submission that as has been recorded by the Ld. CIT(A) the assessee has been claiming the income as sales commission , the auditors of the assessee company recognized payment to MMTC as commission. It was the further submission that the entries in the books of the assessee also clearly showed that it was commission. It was the further submission that a perusal of the order of Ld. CIT(A) in para 5.1 clearly showed that MMTC was providing various services to the assessee as an agent. It was the submission that the 3% so called trade margin paid to MMTC was commission on which TDS u/s. 194H was liable to be deducted and the same having not been deducted the order of the AO treating the assessee as the assessee in default u/s. 201(1) and 201(1A) of the Act was liable to be upheld. It was the further 4 ITA Nos. 295 to 298/CTK/2013 Neelachal Ispat Nigam Ltd. AY: 2006-07 - 2009-10 submission by the Ld. DR that the liability in regard to section 201(1) of the Act had been deleted by the Ld. CIT(A) as MMTC had offered the said 3% commission to income-tax.
6. In reply, the Ld. AR drew our attention to page 99 of the paper book wherein it has been confirmed by MMTC that the actual purchase order issued to the assessee has been accounted for in MMTC's books as purchases and subsequent sales thereof to various parties as sales and that the 3% charged on the total purchase from the assessee is treated as trade margin and that the transaction between the assessee and MMTC was principal to principal. The Ld. AR further drew out attention to the letter of MMTC to the Income-tax Officer (TDS) dated 20.03.201 wherein MMTC has specifically replied in respect of the information sought u/s. 133(6) of the Act that the purchases from the assessee has been dealt with by MMTC as purchase and sales in its books, that MMTC has received a 3% trade margin which forms part of the differential amount of purchase and sales accounted in MMTC's books of account on the total sales channelized through MMTC by the assessee by issuing debit notes on the assessee. It has been further clarified by MMTC that for the FY 2007-08 that for the second quarter of FY 2007-08 certain TDS had been deducted which was wrongly made. It was the submission that even MMTC did not recognize the transaction of the purchase and sale of the products of the assessee by the MMTC as agency transaction. It was the submission that the order passed u/s. 201(1) and 201(1A) of the Act was liable to be cancelled.
7. We have heard rival submissions. At the out set, a perusal of the letter dated 10.03.2011 from MMTC to the ITO (TDS) clearly explains the nature of the transaction between MMTC and the assessee. The persons to an agreement would know what is expected in the agreement. Third parties to the agreement interpreting the agreement could give various meanings to the agreement. Admittedly, MMTC has written to the assessee admitting that the transaction is on a principal to principal basis on which a trade margin of 3% is being claimed. Admittedly, MMTC has specifically clarified that they are accounting the purchase from the assessee in their books as purchase and sales thereof as sales. This has also been conveyed by MMTC 5 ITA Nos. 295 to 298/CTK/2013 Neelachal Ispat Nigam Ltd. AY: 2006-07 - 2009-10 to the ITO (TDS) in response to the information sought u/s. 133(6) of the Act. Here, we may mention that at this document being the letter from MMTC to the ITO (TDS) dated 10.03.2011 though obtained by the AO has not been discussed any where in his order. In short an evidence favourable to the assessee which is available on record of the AO has been kept back and then the agreement between the assessee and MMTC is interpreted. Further a perusal of the sale bills raised by the assessee shows that the buyer of the product is MMTC. Further, MMTC under its own invoice has sold the product of the assessee. Admittedly, as per the invoice the delivery of the products being more so, the details of the consignee is mentioned and the buyer is specifically mentioned as MMTC. A perusal of page 98 of paper book clearly shows that the MMTC has issued ;debit note in respect of the 3% trade margin. Now coming to the agreement entered into between the assessee and MMTC. Admittedly, MMTC is the sole and exclusive agent for marketing and sale of products of the assessee. In short, MMTC holds the monopoly over the products manufactured by the assessee. MMTC is responsible for negotiation of the price based on the floor price as per article 4.3. MMTC is liable for providing the credit term, discounts and financial packages etc. MMTC is also responsible for collection of the payments from customers. The floor price of the assessee's products are fixed by the Steering Committee consists of two members of the assessee and two members nominated by MMTC. In short, MMTC has through this agreement taken control over all the products manufactured by the assessee. This is a case where, if we accept MMTC as the agent of the assessee, where the agent is controlling the principal, which is practically not feasible. Only a principal can control another principal through a monopoly arrangement. MMTC controlled over the assessee is also limited till such time as the corporate guarantee as provided by MMTC. The minute corporate guarantee is extinguished the assessee breaks free from the clutches of MMTC. Further, the fact that MMTC has specifically confirmed that it has purchased from the assessee and selling and both the purchase and sales are recorded as such in its books when read along with agreement clearly shows that this is a transaction of purchase and sale whereby there is a guaranteed profit of 3%. Further, the fact that sales tax is being levied on the purchase by MMTC from the assessee as also on the sale by MMT to third parties 6 ITA Nos. 295 to 298/CTK/2013 Neelachal Ispat Nigam Ltd. AY: 2006-07 - 2009-10 clearly shows that these are two separate transactions and there is no commission paid by the assessee to MMTC. Under these circumstances, as we are of the view that the transactions between the assessee and MMTC is one of the purchase and sale. We are of the view that the 3% guaranteed profits more so called as the trade margin by MMTC is not in the nature of commission but the profit margin of MMTC which is not liable for deduction of TDS u/s. 194H of the Act. Under these circumstances, we are of the view that the assessee being not liable for deduction of TDS u/s. 194H of the Act on the trade margin of 3% debited by MMTC on the sales made in respect of the goods manufactured by the assessee. We are of the view that the assessee cannot be held to be an assessee in default for the purpose of levying u/s. 201(1) and consequently interest u/s 201(1A) of the Act.
8. In the result, appeals of the assessee stand allowed.
9. Order is pronounced in the open court.
Sd/- Sd/-
(K.K.Gupta) (George Mathan)
Accountant Member Judicial Member
Date: 10th June, 2013
(JD) Sr. P.S
Copy forwarded to :-
1. Appellant - Neelachal Ispat Nigam Ltd., 1st floor, Annexe IPICOL House, Bhubaneswar
2. Respondent- ACIT (TDS)-II, Bhubaneswar
3. CIT(A)-II, Bhubaneswar.
4. CIT, Bhubaneswar
5. DR, ITAT, Cuttack True copy By Order Sr. Pvt. Secy.
ITAT, Cuttack